U.S. Payroll Report - Nothing New To Offer

by: Citylytics


US payroll report for August disappointed the market somewhat.

The Fed will remain in wait and see mode and wait for signs of inflation strengthening.

The EUR/USD movements mainly depend on the ECB in the near term.

ECB’s meeting on Thursday might be a turning point for the EUR/USD.

The US payroll increased by 156k in August and thus disappointed the market that expected stronger growth of around 180k. A brief look at the sectors reveals that manufacturing added 6k jobs in August while the services sector recorded a gain of 95k jobs. The underperformance was recorded in education and health services (+25k) and leisure and hospitality (+4k). Moreover, revisions for June and July showed that employment gains were 41k less than initially reported. The unemployment rate thus unexpectedly rose to 4.4% from a 16-year low of 4.3% in July. At the same time, average hourly earnings increased by 0.1% m-o-m, below market expectations of 0.2% m-o-m growth, leaving the yearly rate steady at 2.5%.

Chart 1: Employment and average hourly earnings by industry for all employees, August 2017, seasonally adjusted

Source: US Department of Labor

Hurricane Harvey had no impact on the August employment release as households survey data collection was completed before the storm. However, August payroll data have a tendency to disappoint in the first release, only to be revised higher later. Such performance owes to the fact that because of summer vacations, an increased number of companies report their employment data too late to be included in the first release for August. Therefore, we will probably see some upward revisions in September.

Be that as it may, the unexpected rise in the unemployment rate will not change much for the Fed. After all, the monthly payroll growth will have to moderate in the medium term as there is barely any slack left on the labor market. But even a more moderate growth will be enough to put further downward pressures on an already low unemployment rate. As the wage pressures remained moderate, the report did not offer any new insights for the Fed.

The Fed will therefore remain in wait and see mode and wait for signs of inflation strengthening to decide whether or not to deliver third rate hike this year. In the meantime, the Fed will most likely announce the shrinking of the balance sheet at the September FOMC meeting as expected. As the latter is already priced in, I do not expect that the Fed will have any stronger impact on the EUR/USD levels in the near term. After all, the exchange rate barely moved after payroll release as market is mainly focused on the ECB’s meeting on Thursday. The meeting might be a turning point for the EUR/USD pair in my view. Following Reuters' reports that some members of the ECB Council are worried about the recent euro strengthening, Bloomberg reported that the ECB plans to postpone the tapering announcement until December. This should be enough to at least prevent the new euro longs. If Draghi shows any signs of concern regarding the strong euro at the press conference after the meeting, the EUR/USD might fall to approximately 1.17 in my view.

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