Job creation in the United States has slowed unexpectedly leaving markets divided on the biggest question for the world economy. Will the Federal Reserve begin to curtail its quantitative easing program in the fall?
The U.S. economy added 162,000 positions in July, missing the forecast for 185,000 new employees. The totals for May and June were revised down by 26,000, from 195,000 to 188,000 in June and from 195,000 to 176,000 in May. The unemployment rate dropped to 7.4 percent from 7.6 percent in June.
Market anticipation had focused on the improving state of the labor economy, specifically its implication for the continuation of the current quantitative easing program, and the currency, equity and bond markets reacted swiftly to the miss.
The euro soared against the dollar, climbing from 1.3195 to 1.3277 in the minute after the release and to 1.3285 within ten minutes. Dow futures dropped about 45 points and the yield on the 10-year bond fell nine basis points to 2.62 percent.
Prior to this morning the three month moving average for non-farm payrolls had been 196,000. But with the release and revisions the average has dropped to 176,000. It is now appreciably lower than the 207,000 average in the first quarter and the 209,000 average in the fourth quarter of last year.
The Fed and Chairman Bernanke have repeatedly pointed to a better labor economy as the necessary precursor to end of the central bank's $85 billion a month in securities purchases.
Until today market sentiment put the beginning of the end of that program at the September 17th and 18th FOMC meeting. With only one more payroll report before the next Fed policy meeting, a September date for QE destiny seems increasingly unlikely.
Chief Market Strategist