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NFP Instant Reaction: September Rate Hike Back in the Fed’s Crosshairs

The US Non-Farm Payrolls report just hit the wires, showing an increase of 280k jobs in May vs. 222k expected, and while the headline reading was strong, the subcomponents of the report were even stronger.

While the unemployment rate ticked up 0.1% to 5.5%, it was a “good” increase in unemployment: rather than being driven by more unemployed Americans, the rise was due to a rise in the labor force participation rate (the denominator in the unemployment rate), which edged up 0.1% to 62.9%. Meanwhile, the household report confirmed the strength in the headline number and there were positive revisions of 32k to the previous two months’ reports. Most importantly, the average hourly earnings (AHE) measure rose by a solid 0.3% m/m (vs. a 0.2% rise expected). As we noted in our NFP preview report, traders were looking at this measure to break the “inflation tie” between the strong Core CPI reading and weak Core PCE figure, two other widely-watch measures of price pressure.

After such a strong report, traders are putting a potential September rate hike by the Federal Reserve back in their cross hairs. The market-implied probability of such a move rose to 33% in the wake of today’s jobs report, according to the CME’s FedWatch, and that probability could rise further if other aspects of the economy start to reflect the ongoing strength in the labor market heading through this summer.

Market Reaction

The market reaction reflects the strength in the US economy and improved odds of a September rate hike by the Fed. US 10-year treasury yields have spiked to a yearly high of 2.42% as of writing, leading to a commensurate rise in the dollar index back to its 50-day MA at 96.50. EURUSD collapsed over 200 pips in the wake of the report and USDJPY exploded through psychological resistance at 125.00 to a high at 125.65 as we go to press. Of course, not every market is as enthused by the report: US equities are pointing a modestly lower open, gold has finally broken below its 2-month range from 1175 to 1225, and oil is trading back toward the day’s lows in the mid-57.00s.

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