Will The Fed Raise Rates After NFP Mess?

Everyone was watching the US Jobs Report on Friday, which was the most important event ahead of the Federal Reserve decision this month. The market seemed very confident that the Fed will raise the rates no matter what, given the fact that some of the economic activities have improved.

However, on Friday, the estimates of a rate hike in June deteriorated significantly, especially after the announcement of the Jobs Report data, despite the fact that the unemployment rate declined to new levels not seen since the financial crises.

Deep In To The Numbers

Looking into the numbers, Friday’s report is not only about May’s outcomes, but there was also a significant downward revision in the previous figures for the month of April and March as well, which increases the fears of a faster slowing down in jobs creation.

The US economy added only 138K new jobs in May, despite the fact that the estimates were to add close to 185K new jobs. This is also below the lowest estimates which were around 140K

Additionally, April’s big beat has been revised significantly lower to 174K instead of 211K. Above all this, March was revised even lower to 50K instead of 79K. This is very significant news for the Fed, as the signs of a notable slowing down is now much clearer than before.

Full-time jobs also tumbled by 367K last month, which is the biggest drop in three years, while part-time jobs remain on the rise.

Why Is Unemployment Declining?

As for the unemployment rate, it’s true that it slipped back to 4.3%, but this is on the back of lower participation rate, which declined to 62.7 down from 62.9. The number or people not in the labour force soared by more than 600K in only one month

As for the wages, it also disappoints as the YoY stayed at 2.5% despite the fact that the estimates were to rise toward 2.6%.

After the US jobs report figures, it looks like we are approaching beginning of a downturn cycle, despite the fact that the Fed said that this is transitory; but the data is not showing any signs of a notable recovery yet.

Will The Fed Raise Rates?

For the past week, the Federal Reserve have been silent with very few members talking to the media, which raises more questions.

Some would say that the Federal Reserve will go ahead and raise the Fed Fund Rate by another 25bps as it promised the world to do so since more than six months now.

Since there is no significant economic improvement during the 2^nd quarter of this year, the Fed is actually in a dilemma.

Raising rates at the beginning of a downturn is the last thing the Fed needs to do. However, the Fed has some room to wait for another meeting to do so.

Despite the fact that the Fed thinks that the recent weakness in Q1 is transitory, raising rates now is not going to add value to the market or even the Fed. It would just increase the Federal Reserve’s credibility.

Will it push the US Dollar higher? Probably no, the US Dollar remains within a solid downtrend since the beginning of the year.

With last week’s close below 96.70’s support area, this would clear the way for a deeper decline, probably toward the next support area which stands at 96.12 later this week.

On the upside view, any rally in the US Dollar Index is likely to remain capped below the recent highs, whether last week’s high around 97.80 or the previous week around 98.0.