NFP Quick Analysis: Expect more dollar falls as the Fed may cut rates

America is still hiring – but offers fewer jobs with lower pay. The Non-Farm Payrolls report for December 2019 has dropped below expectations with an increase of 145,000 against 164,000 expected and higher whisper numbers – given upbeat data leading into the event. Moreover, downward revisions to previous months shed 15,000 jobs.

Worse, Average Hourly Earnings rose by only 0.1% monthly and slipped below 3% yearly – they stand at 2.9% against 3.1% expected.

Will the Fed cut rates?

The US dollar dropped in the immediate aftermath, but there may be more in store. 

The Federal Reserve has two mandates: employment and inflation. The bank seems to have given up on price rises. Jerome Powell, Chairman of the Federal Reserve, said he first wants to see a significant and sustainable increase in inflation before raising rates. John Williams, President of the New York branch of the Federal Reserve, indicated that the bank would have to live with low inflation.

The wage figures seem to vindicate the pessimistic stance on inflation. Without rising pay, prices may remain stuck for some time. 

Yet also the job front is not exactly satisfactory. 2019 has seen the slowest gain in jobs since 2011 – in the depth of the crisis. While some attribute this to the US nearing full employment, the low participation rate – stuck at 63.2% – does not support this theory. Moreover, textbook economics suggest that wages should rise when employers find it hard to find workers – and salaries are stuck as well.

The next Fed decision is on January 29. While Powell and co. are expected to leave rates unchanged, this jobs report may give them pause for thought – perhaps signaling the end of their pause. 

And if expectations for a rate cut increase, pressure on the dollar may follow. This retreat may be the beginning, not the end of the response to December's NFP.