Weak US payroll report rules out October Fed hike

Enrique Díaz-Álvarez05/Oct/2015Currency Updates

Investor focus last week was on the critical September job market report out of the US and its implications for a Federal Reserve interest rate hike. The report was a disappointment, as it showed that the pace of job creation has slowed from the 200-250,000 number we had grown accustomed, to just 142,000 in September, bringing the four month average down to below 200,000. The currency market’s reaction to this disappointment was remarkable. After selling off initially, the Dollar proceeded to recover more than all the post-payroll losses against major European currencies and in fact was able to eke out a gain for the week.

In our view, the weak payroll report rules out an October interest rate hike. However, there will be two more payroll reports before the December decision. We expect the job market to return to the 200,000+ level in each of these, which will provide enough cover for the FOMC to deliver on its forecasted 2015 hike before the end of the year.


We saw solid numbers out of the UK service sector last week. Services output has been growing at a better than 3% rate over the three months to July. This optimism is tempered a bit by a decline in the August PMI, but still leads us to expect third-quarter growth in the 2.5%-3% range.

This solid performance, together with rapidly diminishing labour market slack and wages that are still growing solidly in real terms, should be enough to warrant a first Bank of England interest rate hike in February of 2016. Although we need to see some validation of this in the form of further dissenters calling for immediate hikes at next week’s Bank of England meeting.


Last week, key data out of the Eurozone provided support for an expansion of the ECB’s quantitative easing program.

Inflation dipped into negative territory again, on the back of lower energy prices. However, not all deflationary pressures can be blamed on lower commodity prices as even core inflation remains below 1%. Unemployment continues to be stuck at a sky-high 11% and the rate of improvement has slowed to a crawl, at barely 0.05% a month.

The combination of slack in the economy and very low inflation seriously brings into question whether the ECB’s forecasts, for inflation to return to target, can be realised. That was clearly the market’s view, with the Euro failing to register any sizable gains from the very weak US labour report, ending the week only just up against the Greenback.


The September labour market report was a significant disappointment.

Job creation slowed to 139,000 and there were downward revisions to the previous two months. Unemployment was unchanged at 5.1%, though before the value was rounded up, it did drop from 5.11% to 5.05%. Wage growth slowed noticeably as well, reading flat in September and up just 2.2% for the year. Labour participation also dropped to a new cycle low.

The report was a setback for FOMC hawks, and it rules out the possibility of an October interest rate hike. We maintain our call for a December hike but this is clearly contingent on the next two payroll reports. We think that the slowdown in job creation is inconsistent with other, more positive, indicators out of the US economy and expect job creation to return to its 200-250,000 range. Thus we maintain our call for a 2015 US interest rate hike and continued Dollar appreciation.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.