According to the latest report from the Bureau of Labour Statistics, the US economy added 943K jobs in the month of July, following on from June’s similarly strong 938K job gain. That was above the median forecast of analysts polled by Reuters of 870K in jobs gains, although well within the unusually wide 300K-1.6M estimation range. The headline number was boosted by seasonal factors such as a shift in government-related educational employment (given school closures last year, many kids are catching up in summer school, giving educational employment an unusually large boost for this time of year), but analysts were nonetheless impressed by the report and the signal it sends of underlying US economic strength. The impressive gain in jobs helped push the unemployment rate dropped to 5.4% from 5.9%, larger than the expected drop to 5.7%. The participation rate also rose to 61.7% from 61.6% the month prior.
Thus, the US labour market appears to have begun Q3 on a strong footing. FOMC officials will be happy about the progress being made back towards their target of full employment (which is likely defined as an unemployment rate in the mid-3.0s%). A strong of further strong jobs reports over the coming months should be enough to convince FOMC members that the US economy has made “substantial” progress back towards the FOMC’s employment goal, thus giving the bank the green light to begin tapering its QE programme. The timing of this taper remains a key uncertainty for markets; some FOMC members, like Fed’s Waller who spoke earlier in the week, want the taper to begin soon and to happen at a rapid pace in case the Fed needs to hike interest rates in 2022. Other FOMC members, such as the influential Braindard, have sounded a little more cautious on the taper timeline. For reference, whilst Waller says he wanted the taper to start in October if the July and August employment reports were strong, Braindard said she wanted to wait until the Fed has the September employment report in hand to decide if the US is ready for QE tapering, and if so, the taper might then only start at the beginning of next year.
Today’s strong jobs report appears to have bolstered the case for tapering sooner (like Waller is pushing for) rather than later (like Brainard is pushing for). After all, the annual pace of consumer price inflation is currently running well above the Fed’s 2.0% target and key FOMC members seem to be growing more concerned that inflation could persist at elevated levels longer than the bank currently anticipates – FOMC Vice Chairman Richard Clarida, seen by many as the “thought leader” at the Fed, noted that risks to inflation increasingly lay to the upside in a speech earlier this week. Thus, as various more hawkish FOMC members (like Waller, but also Bullard and Kaplan) have argued, it may be wise to wind down the asset purchases as soon as possible (i.e. by mid-2022) just in case if inflation does overshoot the Fed’s target more than expected and the Fed needs to start hiking interest rates earlier than expected (i.e. in mid-2022). Remember that the Fed has expressed a preference to be finished tapering its bond-buying programme prior to beginning hiking interest rates. If its bond purchase tapering is proceeding too slowly (i.e. if it was scheduled to end at the end of 2022) but the Fed realises it needs to start hiking interest rates in mid-2022, they might have to quickly axe the programme, which could be seen as a “panic move” that could upset markets and undermine market confidence that the Fed has things “under control”.
The fact that today’s US jobs report has strengthened the argument for a prompter tapering of asset purchases is reflected in the market reaction to the data; the US dollar is stronger across the board, with the DXY currently at weekly highs around 92.70 at the time of writing and up about 0.5% on the day. The strong jobs report will likely give dollar bulls enough impetus to push the DXY back towards recent highs around 93.00. Perhaps unsurprisingly, the US dollar is performing best against those of its G10 rivals whose central banks are perceived as being behind the Fed in terms of the normalisation of monetary policy. Against EUR, CHF and JPY, the dollar is up about 0.5%, pushing EURUSD convincingly below 1.1800, USDCHF above 0.9100 and USDJPY above 110.00. The ECB, SNB and BoJ are, after all, many years away from any interest rate hikes. The dollar is also up around 0.5% against the beleaguered Aussie dollar, which continues to struggle amid lockdowns that have seen expectations for continued economic recovery in Q3 evaporate and, subsequently, the RBA have to adopt a more dovish tone. Against NZD, GBP and CAD, where the central banks (the RBNZ, BoE and BoC) are on course to tighten monetary policy at least as fast as the FOMC (in the RBNZ’s case, a rate hike is likely coming later this month!), the dollar is performing less well. It is up 0.3-0.4% against these currencies.
The dollar is being underpinned by a raise in US real and nominal yields; 10-year TIPS (inflation-linked) yields are up about 5bps on the session to -1.05% and 10-year nominal yields are up by a similar margin to 1.28%. US stocks have been choppy but continue to trade right close to record levels; the S&P 500 index currently trades in the mid-4420s and the Nasdaq 100, though a little in the red on the day, remains well supported above the 15K level, with stocks broadly unconcerned by the modest rally in yields. Finally, and perhaps the best indicator of what the latest jobs report means for Fed policy and US financial markets is the reaction seen in gold; spot prices have plummeted from the $1800 level to the $1760s and a test of June lows in the $1750s seems likely. That equates to losses of over 2.0% on the session and over 2.5% on the week. The magnitude of the sell-off in gold is surprising given the comparably smaller moves higher by the USD in FX markets and in US bond yields. This is perhaps telling of the fact that gold traders expect today’s strong jobs report to reinforce FOMC hawkishness on QE tapering, which may further boost USD and yields in the coming weeks (remember that gold has a strong negative correlation to both). If gold traders are right that the recent hawkish shift witnessed amongst FOMC members in recent weeks is going to be accelerated by today’s jobs data, it does certainly feel as though risks to the USD and US bond yields are tilted to the upside.