Bad news on US jobs is good news for emerging markets

The dollar will be weaker, which means commodities have found a new reason to rally, as have emerging markets currencies


The US Federal Reserve was anyway not expected to hike this month because of worries over the Brexit vote, but the lack of job growth gives the Fed enough opportunity to chicken out in July, too. Photo: Reuters
The US Federal Reserve was anyway not expected to hike this month because of worries over the Brexit vote, but the lack of job growth gives the Fed enough opportunity to chicken out in July, too. Photo: Reuters

At least one uncertainty has been removed before the Reserve Bank of India (RBI) unveils its latest monetary policy statement on Tuesday—the US Federal Reserve is not going to hike rates this month and the chances of a hike in July have considerably lessened.

That’s because the US non-farm payroll report for May showed the lowest growth in jobs in more than five-and-a-half years.

The Fed was anyway not expected to hike this month because of worries over the Brexit vote, but the lack of job growth gives the Fed enough opportunity to chicken out in July, too.

It’s not just the jobs report, there are also other signs of a slowing US economy.

The Markit US Composite PMI Output index, a seasonally adjusted measure of US private sector activity in both the manufacturing and services sectors, indicated that May saw the slowest expansion of output since February.

It, too, had the weakest rise in payroll numbers since January 2015, while business optimism came in at a post-crisis low.

Chris Williamson, chief economist at Markit, said, “The PMI surveys point to GDP (gross domestic product) growing at an annualized rate of just 0.7-0.8% in the second quarter, notwithstanding any marked change in June.” That should keep the Fed from hiking.

“Lower for longer” is good news for emerging markets (EMs) and should keep the bull in the ring. The dollar will be weaker, which means commodities have found a new reason to rally, as have EM currencies. What would be interesting is what the Japanese do, given their loud complaints about the strong yen at the G7 meeting.

Nobody seems to be bothered about the fact that, eight years after the financial crisis first reared its ugly head and despite massive and unprecedented monetary stimulus, the US economy seems to be already running out of steam. We’ve seen this movie before, it’s been playing in Japan since 1990.

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