Friday morning brought a pleasant surprise for U.S. markets ahead of a hot summer weekend. July U.S. Non-Farm Payrolls came in at 209,000 jobs created, which was significantly above estimates of 180,000. This led to a reduction in the unemployment rate to 4.3% from 4.4%, which matched estimates. The lower unemployment rate comes despite a higher labor force participation rate of 62.9%, up from 62.8% last month, as individuals who were previously not seeking employment are enticed back to the job market by better economic prospects. Job gains were widely spread across various sectors in July, with exceptional hiring in the leisure and hospitality industry. Hiring in the manufacturing and education and health services industries also hit five-month highs.
Although the job creation numbers were better than expected, markets were looking at the wage growth data with much greater scrutiny. Wages grew 0.3% in July, which matched expectations, and moved year over year wage growth to 2.5%. Over the past few months the Federal Reserve has been placing greater emphasis on inflation, whether it be a reading from the CPI or wage data. In recent weeks, markets have discounted chances of a third rate hike this year from the Fed as inflation data soured. July’s 0.3% growth in wages inflated some of those expectations again, as markets digested the stronger than expected signs of inflation.
In reaction to the report the dollar soared against all major currencies. The dollar index (DXY) saw some much needed relief, rising 0.75% to close at 93.49, after falling almost 9% so far this year. The euro fell 0.81% against the greenback and closed below 1.18 at 1.1774, while the pound dropped 0.75% against the dollar as well. U.S. treasuries fell on the news as chances for another rate hike from the Fed this year rose. The yield on the 10-Year touched 2.286% before closing at 2.264%, up over four basis points on the day.
Should wage data continue to reflect higher gains, and subsequently higher inflation, chances that the Fed will raise rates a further time in December will continue to rise. This would help the dollar to bounce back from the drubbing it has taken so far this year. It would also be a potential catalyst to break 10-Year yields out above the resistance at 2.40%, which has proven a fearfully difficult level to decisively crack recently. Given the gale of political headwinds currently holding the dollar back, any support would need to be significant to reverse some of this year’s losses. It will take the combination of a rate hike and political success on the pro-growth Trump administration agenda to substantially boost the dollar. Currently, any progress on tax reform or financial deregulation looks barely existent, if at all. Only time will tell what successes may be had, but as of now the market seems comfortable to handicap any chances of progress at a large discount.
The upcoming week is full of Fedspeak, with William Dudley (New York) speaking on Monday and Thursday, Neel Kashkari (Minneapolis) speaking on Monday and Friday, and Rob Kaplan (Dallas) speaking on Friday as well. China releases trade data on Tuesday and inflation metrics on Wednesday. The Reserve Bank of New Zealand meets and makes a policy announcement on Thursday regarding interest rates and overall monetary policy. Finally, U.S. CPI is released on Friday. The inflation metric will be closely watched as another barometer on the overall economy and to direct Fed expectations.