The US employment data disappointed. The headline grain of 223k was only slightly less than expected, but the job growth in April and May was revised lower by 60k (almost evenly divided). The most disappointing parts of the report were the decline in the participation rate to a new cyclical low of 62.6% from 62.9% and the lack of increase in the monthly average of hourly earnings. This pushed the year-over-year rate back to 2.0% from 2.3%.
The fact that the unemployment and under-employment rates fell is mitigated by the decline in the participation rate. This and the lack of hourly earnings growth suggests that important slack remains in the labor market.
That said, the US job growth improved in Q2 from Q1. The average monthly gain in non-farm payrolls was 195k in Q1, and this increased to 221k in Q2. Factory jobs rose by 4k while construction jobs were flat. The government sector added jobs in recent months, but none in June.
We suspect that on balance, views of Fed policy will not change based on this report. Those, like ourselves, who see September as the likely window, will not be dissuaded by today's data. Those expecting December or later for lift-off are also unlikely to change their minds. There was never really much likelihood of a rate hike in July.
The dollar was sold on the disappointment, but we suspect given the long holiday in the US and the weekend referendum in Greece, participants are unlikely to take large bets today. The euro ran out of steam near $1.1120. Support is seen near $1.1140. The dollar retreated against the yen as US Treasury yields slipped on the news.
We are reluctant to draw much in the way of implications for other economic data based on today's employment report. Auto sales for June were still strong, above the 17 mln annual pace. While this is a bit slower than May, it still points to healthy US consumption. The lack of improvement in hourly earnings is unlikely to signal a retreat by US consumers who have boosted their savings in recent months.
There probably is scope for economists to lower their GDP forecasts. The 3% growth anticipated by the median for the coming quarters is likely too high. We feel more comfortable in the 2.25%-2.50%.