U.S. Payrolls Mitigate Fears

U.S. nonfarm payroll data quell market fears ahead of the Bank of England’s July policy meeting.

What did data show?

Payrolls exceed expectations.   Friday’s nonfarm payrolls — showing that firms added 287,000 jobs in June — temper fears about the U.S. labor market. Following May’s disappointing data, showing only 38,000 new jobs, the Fed appeared more dovish in June. This caused market expectations for rate normalization to drop below 0% in 2016. Although last month’s labor print reflects a period before Brexit, it salvages investors’ concerns about U.S. economic strength. Since Friday, expectations for rate hikes rose marginally.

What does it mean for markets?

Risk-on.  Due to new headwinds post-Brexit, the Fed is unlikely to raise rates more than once this year. As a result — and in contrast to last year — positive U.S. data does not signal tighter Fed policy. Now that the Fed has expressed excess caution, Friday’s payrolls were only good news to markets, boosting global equities.

What does it mean for global policy?

Stability ahead of BoE.  Leading up the Bank of England’s first meeting post-Brexit, global equities have recovered from their immediate plunge. Friday’s optimistic U.S. payroll print will relieve pressure on the BoE, because it is perpetuating the market rally. Furthermore, Friday’s print mitigates longer-term fears about U.S. demand, and therefore global growth. With market volatility contained, the Bank of England is likely to focus on internal risks to growth on Thursday.