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Wall Street was in full retreat Friday as the world’s two economic war tanks; the ECB and US Nonfarm Payroll reports came and went. The ECB was unexpectedly dovish, having admitted that Quantitative Easing is not doing as much as initially estimated for the local economic growth in the world’s largest economy and the Central Bank downgraded its economic forecasts, which resulted in a weakening EUR across the board.

If that was not enough, for the past 3-4 weeks, investors have been on their toes, amid fears of a global economic slowdown, triggered by Chinese poor macroeconomic data that resulted in a 42 percent decline in the Shanghai Composite, from its peak in June. The turbulence in the second largest economy, extended into Europe and America and worldwide indexes closed August with one of the largest monthly losses in years.

The US Central Bank has been anticipating a rate hike for this year, remarking that tightening the economic policy is “data dependent.” That means inflation and employment need to reach the Central Bank comfort levels, or at least be on their way towards them. During the last FED’s meeting, there was a slight change in the wording that triggered several alarms: the Central Bank said that it would like to see “some” improvement in data before a lift off, which suggests members are willing to raise rates, even if the data does not meet their objectives.

Inflation in the US remains subdued and far from the 2.0 percent target. According to the latest PCE figures, the core PCE price index stands at 1.3 percent YoY. Nevertheless, the year-on-year inflation figures are showing tepid advances month after month, which suggest that at least the deflationary spiral is over. Falling oil prices have been a stone in the water, as they are keeping energy prices depressed, but the latest recovery in the commodity seems poised to extend, which may add to the case of higher inflation in the US.

The second leg on which a rate hike rest, is employment. And this Nonfarm Payrolls release was the last before the September FOMC’s meeting, when the Federal Reserve can deliver its first rate hike since 2006.

Lately, Fed members have been quite hawkish when it comes to raising rates, a good example of that could be this Thursday’s Fisher comments, who said that delaying a rate hike due to market swings would show that the market is in control, and that “that’s not the mission of the Central Bank.” Which could be understood that even with a tepid improvement in employment data, the FED is ready for a lift off.

Earlier this week, the ADP survey indicated that the private sector added 190K jobs in August, missing expectations of 200K new jobs.

Non Farm Payrolls

The Nonfarm payroll released Friday showed the US economy created far less jobs than expected in August, although the unemployment rate fell to levels considered as full employment by the Fed.

The non-farm payrolls in August reported 173K, missing the estimate of 217K. The previous figure was revised higher to 245K from 215K. The unemployment rate ticked lower to 5.1 percent, beating the estimated drop to 5.2 percent from July’s 5.1 percent, whiles the participation rate dropped to 62.6 percent.

Average hourly earnings increased 0.3 percent from the prior month and 2.2 percent over the past year. Revisions to prior reports added a total of 44K jobs to overall payrolls in the previous two months.

The August number is usually lower and is revised higher in ensuing months. Consequently, this weaker-than-expected figure may not affect Fed rate hike bets in a significant way. Meanwhile,the unemployment rate dropping to full employment levels may support rate hike.


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