NFP Recap Clear as mud for the Fed s September meeting

At long last, traders are free to duck out for the long holiday weekend to celebrate the unofficial “end of summer.” That’s because, earlier this morning, the Bureau of Labor Statistics (BLS) released the marquee Non-Farm Payrolls (NFP) report, which we labeled a “colossal report that may tip the scales for the Federal Reserve” in yesterday’s NFP preview report.

As it turns out, the scales may have been tipped, but only by an ounce or so in favor of the hawks. The headline NFP figure came out at a seemingly disappointing 173k (vs. 215k eyed ahead of the report), but almost every other aspect of the release was better than expected. There were positive revisions of +44k jobs to the previous two reports, and the unemployment rate dropped down to a seven-year low of just 5.1%. Was this a “bad” decrease in unemployment caused by discouraged workers? Seemingly not, as the Labor Force Participation rate held steady at 62.6%. The quality of the jobs was also solid: Average hours worked ticked up to 34.6 from 34.5 previously, and most importantly for the Fed, average hourly earnings rose at a 0.3% m/m pace (2.2% y/y) in a possible sign of inflation coming down the pipeline.

While this isn’t the type of blowout positive report that would shift the probabilities of the Federal Reserve’s “lift off” firmly into September, it certainly leaves that possibility on the table. Therefore, traders are likely in for another two weeks of (over)reacting to the day-to-day economic releases as they try to handicap what the Fed will do at its September 16^th meeting. The odds still favor waiting in our view, but it will certainly be a tough decision for Yellen and company.

Market Reaction

Immediately after the report was released, traders (and their algorithms) seemed to react to the disappointment in the headline figure, with the dollar and bonds falling at the expense of global equities. A few minutes later though, after market participants had a chance to dissect the secondary aspects of the report, the dollar index recovered to trade back near its 50-day MA around 96.30, while stocks sold off sharply, and bonds recovered, with the yield on the benchmark 10-year treasury falling 3bps to 2.13% as we go to press.

Trade will likely die down from here heading into the long holiday weekend in the US, but given the lack of clarity from today’s NFP report, the recent global market volatility has likely extended its stay for another two weeks at least.