The US employment report showed that the nonfarm employment increased by 209k in July, thus surpassing market consensus expectations of 180k. The employment growth in July even exceeded the average of previous three (195k) and six months (179k). In line with the impressing payrolls release, the US long end yields increased while the dollar managed to erase some of its recent losses.
In spite of the fact that the labor force participation also increased slightly in July, the US unemployment rate still managed to decrease by tenth to 4.3% and is below the Fed’s estimated natural rate of unemployment of 4.7%.At the same time the broader measure of unemployment held steady at 8.6% in July.
Meanwhile, the average hourly earnings growth speeded up by 0.1pp to 0.3% mom in July for a 2.5% yoy growth. The latter is somewhat above market expectations and is also a good sign for the forthcoming inflation releases.
Graph 1: Average hourly earnings
Source: FRED Economic data
Strengthening labor market combined with recent growth acceleration should be enough to convince the Fed to deliver one more rate hike this year. However, the market is not pricing any more rate hikes this year as they are apparently waiting for some signs of stronger inflation.
Indeed, the CPI surprised markets to the downside for the fourth consecutive month in June and the Fed chair Yellen said that core inflation movements will be the main driver of further hikes. Luckily for the Fed, there is still enough time until December for inflation to pick up boosted with weaker dollar, strengthening labor market and personal consumption acceleration. All in all, the current EUR/USD levels look like good opportunity for buying dollars while the US long-term yields still have at least 20-30 basis points growth potential by the year end, in my view. The July’s CPI release for the US is scheduled for this Friday and it case it outperforms market expectations (+0.2% mom, 1.8%) there is high chance that the recent EUR/USD rise will be reversed. However, a release in line with market should be enough to at least stop the EUR/USD rise.
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