Jobs Report Is No Friend to the Dollar or the Fed
John Maynard Keynes is often credited with having said “When the facts change, I change my mind.” In that spirit, the U.S. employment report for May should seriously challenge the notion that the Federal Reserve interest-rate increase on June 14 is a fait accompli. For policy makers, the decelerating pace of job growth is a fact they can’t ignore. Traders are already pushing the dollar lower and gold higher -- something that wouldn’t be happening if higher rates were assured.
Despite the drop in the unemployment rate to 4.3 percent -- the lowest level since May 2001 -- Friday’s jobs report adds a wrinkle of risk. The issue is the pace of non-farm payroll job gains, which is the actual number of jobs being created. Although the three-month moving average of 121,000 net new jobs is positive, the pace has slowed dramatically. If the Fed keeps raising rates, it will slow further.
Economists and market watchers are generally worried about three major risks: slumping U.S. auto sales, weaker Chinese manufacturing and the potential for U.S. fiscal policy disappointment. The contractionary level of the Chinese PMI in May for the first time since June 2016 and weaker U.S. auto sales in recent months have only fanned the flames associated with those risks. On the other hand, the Trump administration’s decision to withdraw from the Paris climate agreement has -- for now -- assuaged risks about the potential for the administration to deliver on its pro-growth promises. But with this employment report, the jobs numbers are now something else that economists and market participants will need to watch more closely.
At the top of the list of those watching closely is the Fed’s Federal Open Market Committee. With the modest personal consumption expenditures and consumer price index inflation data in recent months, as well as the modest 2.5 percent increase in average hourly earnings from a year earlier in the May jobs report, there should be little urgency for the Fed to rush rate hikes. A stronger net new jobs figure would have quashed any question of a June Fed rate hike, but the relatively weak 138,000 figure for May, as well as downward revisions of 66,000 jobs to the April and March jobs reports, means that questions of a June rate hike are in play. At the least, Fed policy makers are likely to lower their forecasts for the federal funds rate going forward in the report that will also be released with the Fed’s statement on June 14.
For market participants, that’s likely to prove bearish for the greenback and supportive of gold prices. Technicals for the dollar have been bearish, with an unbroken trend of lower highs since late December. After prices and moving averages converged in March, the U.S. Dollar Index broke out sharply to the downside, and has continued to trend lower. Meanwhile, gold prices have continued to show supportive technicals that have been in place since December 2016, in a trend of consistently higher highs. This was a subject of another article I recently wrote for Bloomberg Prophets.
While the plan to raise rates has been laid out in numerous Fed quarterly forecast reports, those have not only been revised before, but they have been notoriously poor predictors of policy. After all, in September 2014, according to the Fed members’ own forecasts, the mean fed funds rate for the end of 2016 was expected to be 2.67 percent, which turned out to be more than 2 percentage points higher than the actual rate at the end of that year. Fed Chair Janet Yellen stated in Jackson Hole, Wyoming, in August that “Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy.” The May employment report, with its weakening trend of job gains, may be a disturbance that buffets the plans of a June Fed rate hike.
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