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Worse than expected nonfarm payrolls do little to allay concerns over interest rates

Today’s nonfarm payroll has come in at 209k and the unemployment rate increased to 6.2%, but more importantly, the average hourly earnings did not increase as much as was expected staying flat at 0.0%.  This is a key metric watched by the US’s Federal Reserve and it comes as little surprise to see the dollar giving back some of its gains from recent days.  Even equities have bounced with some relief following a couple sharp sell offs.

It will be interesting to see how long this very short term trend lasts following the release of the data.  Often the initial move is reversed and even though the figures are not dollar positive, the trend of dollar strength that has emerged recently could remain.

The labour market in the US is improving as can be seen on a weekly basis, as well as the monthly nonfarm payrolls.  Despite today’s hiccup in average earnings, Thursday’s employment cost index was higher than expected, setting off a few alarm bells at the Fed and this will all translate into a stronger US economy.

This week concludes with investors becoming more fractious, not only due to rising geopolitical tensions, but because of the realisation that interest rates are likely to rise sooner than many had previously thought.  Both equity and FX volatility has spiked dramatically in the past few days and equity markets in particular have been hit hard.  The dollar strength that established itself in July has continued into August, for sterling and the euro, their dizzy highs against the dollar only a few weeks ago seem a long way off now.  GBPUSD in particular looks like it’s fallen off a cliff since mid-July.

A next key calendar to have in mind is the next FOMC meeting on 16/17 September where the Federal Reserve’s Janet Yellen will also hold a press conference.  The markets will want to see if the language has become any more hawkish, especially after this Wednesday when Charles Plosser became the first to distance himself from the rest of the Committee by voting against the policy action, as his more hawkish stance called for an amendment to the guidance that says interest rates will remain low “for a considerable time after the asset purchase program ends”.

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