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Analysis

US employment report | NFP: Modest gains and lower earnings

BY Janne Muta

|September 1, 2023

The latest US employment report, also known as the Non-farm Payrolls (NFP) for August 2023, displayed a modest job gain of 187K, marginally above market expectations of 170K. Nonetheless, the figure for the prior month was revised downwards to 157K from 187K, contributing to a two-month net revision of -110K, compared to -49K previously. This development marks the third consecutive month where job gains have failed to breach the 200K threshold, indicating a deceleration in the US labour market. Notably, the unemployment rate rose to 3.8%, surpassing the expected 3.5%.

Market reactions to the US employment report

Initial market reactions to the US employment report were relatively muted. The USDJPY currency pair moved lower, hinting at a market reassessment of the future trajectory of US interest rates. Meanwhile, rate-sensitive assets such as the Nasdaq and gold experienced modest gains. These movements potentially reflect investor expectations that the Federal Reserve might adopt a less aggressive approach to tightening monetary policy in the short term.

Fed Funds Futures and market expectations

Significantly altering their projections, the Fed Funds Futures markets now anticipate the first rate cut to occur in March, as opposed to the earlier expectation of May. This change aligns closely with the softer data in the US employment report, specifically the employment numbers and wage growth, suggesting that market participants foresee the Federal Reserve adopting a more accommodative stance sooner rather than later.

Summary and implications

In summary, although the headline NFP figure for August modestly exceeded market expectations, the nuanced details within the US employment report, such as downward revisions, a higher unemployment rate, and sluggish wage growth, have led to a cautious market response. The Federal Reserve's balanced approach to its dual mandate appears to be validated, and market sentiment is adjusting to foresee a sooner-than-expected easing in monetary policy. The initially tepid market reactions underscore this cautious optimism and the fluidity of the economic landscape.

For more analysis on the US economy, visit our recent reports on EURUSD and S&P 500.

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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