Dollar Bulls Should Be Worried After This Jobs Report
On the surface, the U.S. jobs report for March should be something to celebrate. After all, the unemployment rate fell to 4.5 percent, the lowest since May 2007. It took almost a decade to get there after peaking at 10 percent in October 2009. But this drop is not sufficient on its own to justify a celebration, let alone a June interest-rate increase by the Federal Reserve. In fact, the Fed could very well be on hold until September.
At 98,000, the number of net new jobs created in March was soft, coming in below the 180,000 median estimate of economists surveyed by Bloomberg. The report calls into question the narrative of an economy on autopilot that continues to generate strong job growth amidst rising rates. The downward revision of 38,000 fewer jobs for the previous two months only adds to those questions.
The most recent quarterly Fed member forecasts show a path of higher rates, with a mean estimate of 1.4 percent for the end of the year, which is up from the current target range of 0.75 percent to 1 percent. And some market participants had become even more hawkish than members of the Federal Open Market Committee.
Although the Fed has a dual mandate to support full employment and contain inflation, its policy is not on a set course. Yes, the economy is at full employment, but the slower March job gains will make the April employment report critical for determining if the latest number is a blip or the start of a new trend.
It's not hard to find weakness in U.S. economic data beyond the jobs report, and there are likely to be some other unpleasant reports ahead. In early February, the Atlanta Fed’s GDP Now report was showing an expected 3.4 percent annualized pace of growth for U.S. gross domestic product for the first quarter of 2017. That has since fallen to 1.23 percent as of April 4.
On top of the potential for a weak first-quarter GDP report, the recent decline in auto sales, and the risk of disappointment related to a failure to implement legislation that provides for corporate tax cuts presents downside risks to growth in the second and third quarters. It would also present downside risks for equity markets.
Plans to implement further monetary tightening have rested on an assumption that seems valid: The economy is at the phase in a business cycle where the job market is solid and inflation is accelerating, but not surging. Before today's jobs report, the federal funds futures showed a probability of a 25 basis point rate hike in June at around 63 percent, and that hasn't budged much. Futures also reflect a greater-than-50-percent chance of only one more rate hike before the end of the year.
Uncertainty of fiscal and monetary policy is rising, and overly hawkish expectations for the Fed may have overshot to the upside. While the dollar is up today on geopolitical risks tied to Syria -- and the case can be made that risks are boosting Treasuries, too -- a change in perception about future Fed policy is likely to weigh on the greenback and rates, while supporting precious metals prices.
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