Investing.com – A worse-than-expected jobs report may do little to alter the Federal Reserve’s (Fed) plans to tighten monetary policy at the next meeting on June 13-14 with a rate hike already baked in, but markets question whether the central bank may have to consider and “even more gradual” removal of accommodative policy.
Saxo Bank head of FX Strategy John Hardy commented that the May jobs report was an “ugly one (…) virtually across the board”, pointing to not only the disappointing non-farm payrolls (NFP) and downward revisions to the prior month’s data, a weak read on wage inflation and the fact that even the positive dip in the jobless rate was only due to the fact that the participation rate fell to the lowest level in five months.
“All around uninspiring and though it may not affect whether the Fed hikes at the June 14 FOMC meeting, they will have to sound very flexible on their guidance,” Hardy said.
ETX Capital senior market analyst Neil Wilson explained that the rate hike in June was already a done deal and that the jobs report shouldn’t affect the Fed’s thinking in the near-term.
“We know the Fed is more than happy to look through this kind of thing,” he said.
“Indeed, (Fed chief) Janet Yellen isn’t that fussed about one quarter of weaker growth, so she’s hardly going to be troubled by a soft-ish month or two of job creation,” Wilson insisted.
Economists at Danske Bank Research added that markets already expected a June rate hike, making it “more difficult for the Fed not to deliver”.
In fact, investors seemed unconvinced that the report would change the central bank’s mind with the odds for a June hike currently unchanged from prior to the release at 86.5%.
Allianz chief economic adviser Mohamed El-Erian also admitted that the “jobs report doesn't seem weak enough to take June hike off the table”, although he suggested that it “makes another one in September unlikely.”
Wilson suggested that the key was the extent to which the market thinks the Fed is ready to do one or even two more hikes this year.
“Today’s jobs numbers arguably make the Fed a touch less likely to tighten as quickly as the most hawkish estimates suggest,” he concluded.
Fed fund futures did slightly lower the bets for a second hike in December by two percentage points to 38.4%.
This may explain the reaction in the dollar and gold that switched directions from earlier trading after the release.
Despite earlier small gains prior to the report, the dollar index was last down 0.44% at 96.73.
Gold, for its part, recovered from earlier losses of around 0.3%, to rise 0.63% to $1.274.96.