Forex trading – weak US jobs numbers make a rate rise less likely

The Federal Reserve is odds-on to leave rates on hold when it meets on June 15th, following an ultra-weak US jobs report that signalled the ongoing risks to the economic outlook.

Following some decidedly hawkish noises in the preceding weeks since its April meeting, the central bank is now unlikely to raise short term interest rates until later this year, according to market indicators.

Dollar_NFP

NFP Miss

 

Relatively upbeat economic data over recent months and becalmed financial markets had spurred some bullish comments from Fed officials.

Fed chair Janet Yellen said at the end of May that a rate rise would happen in the “in the coming months”, while other members of the policy-setting Federal Open Market Committee (FOMC) said they too would consider a 25-basis point hike this summer to be appropriate. Richmond Fed president Jeffrey Lacker told Bloomberg that “the case would be very strong for raising rates in June” after global risks had “entirely dissipated”.

But rising optimism around the US economy came to a juddering halt last week as the monthly non-farm payrolls spectacularly fell short. The 38,000 jobs added by US employers in May was around one-quarter of the expected number and the worst reading in six years. In short it seems to have had a chilling effect on rate hike expectations this summer.

Fed funds futures show a marked shift in market sentiment. The implied chances of rates rising in June is around 4%, having rising above 30% after minutes from the April meeting demonstrated policymakers were close to hiking. The implied odds of the Fed raising rates in July is around one in four, according to CME Group’s FedWatch tool.

Yellen Speaks

 

On June 6th, following the NFP miss, Yellen played a more cautious hand than she had done in May. She reiterated the oft-repeated mantra that monetary policy is not on a preset course and that the Fed would respond to incoming data.

“I expect that further gradual increases in the federal funds rate will probably be appropriate to best promote the FOMC's goals of maximum employment and price stability,” she said. But she dropped any reference to raising rates in the coming months and instead suggested policymakers would prefer to wait for risks to be resolved.

She conceded that the most recent labour market report was “disappointing”. However, the economy is “fairly close to the FOMC’s goal of maximum employment”, she added, hinting that the NFP numbers may not deserve to impact markets in quite the manner they have been of late.

Moreover, wage growth was “encouraging” and there are other reasons to think the Fed may still want to raise rates in the summer.

“Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC's goals are fully reached,” said Ms Yellen.

“And if the headwinds that have lingered since the crisis slowly abate as I anticipate, this would mean that the neutral rate of interest itself will move up, providing further impetus to gradually increase the federal funds rate.”

Brexit Risks

 

Certainly, Britain’s referendum on EU membership would appear to count a​gainst a June rise happening – the FOMC meeting takes place just a week before the vote on June 23rd.

 "A UK vote to exit the European Union could have significant economic repercussions,” cautioned Ms Yellen.

This chimes with comments from Fed governor Lael Brainard, who warned that a Brexit could produce a "significant adverse reaction" in the US market.

"Because international financial markets are tightly linked, an adverse reaction in European financial markets could affect US financial markets, and, through them, real activity in the United States," Ms Brainard said.

 

Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.