The step-down in employment growth comes after the economy created a total of 546k jobs in June and July. The smaller-than-expected rise in payrolls likely reflects difficulties adjusting the data for fluctuations related to school calendars. Over the last several years, the government's initial August payrolls estimates have been weak only to be subsequently revised higher.
The report came on the heels of news on Thursday that the manufacturing sector contracted in August for the first time in six months, which had already cast a shadow on a rate hike at the Fed's September 20-21 policy meeting. Financial markets on Friday were pricing in a roughly 21% chance of a rate hike this month and a 54% probability in December. In our opinion the Fed will raise rates in December.
Richmond Fed President Jeffrey Lacker said signs of US economic strength suggest the Federal Reserve's delay of further interest rate hikes is increasing the risks of it falling behind the curve on its objectives.
A second report from the Commerce Department on Friday showed the trade deficit fell 11.6% to USD 39.5 billion in July as soybean sales buoyed exports to a 10-month high, in another boost to the growth outlook for the third quarter. The Atlanta Fed is forecasting gross domestic product rising at a 3.5% annual rate in the third quarter.
The EUR/USD dropped on Friday despite disappointing US jobs numbers. On the other hand, macroeconomic data from the Eurozone are getting better. Eurostat said that retail sales, a proxy for household spending, rose 1.1% mom and 2.9% yoy in July, in both cases much more than market expectations. The boost in retail sales came in the month following the June 23 Brexit referendum, in a sign that consumers' morale was not immediately hit by the British vote to leave the EU.
We expect Fed to stay on hold in September, no action form the ECB this week and gradual acceleration in Eurozone in the coming months. This should support the EUR/USD in both near and medium term. Our buy order at 1.1085 has not been filled and we raised out bid to 1.1150.
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