The US unemployment rate unexpectedly fell to 4.3%, a new multi-year low, but it is a misleading optic for what is a disappointing report. It is likely not weak enough to put much doubt into expectations for a Fed hike later this month, but it will reinforce the caution in the Beige Book and in recent comments from some Fed officials.  

Besides the decline in the unemployment rate, and a further decline in the under-employment rate (U-6) from 8.6% to 8.4%, there is little positive in today’s report.  

Non-farm payroll growth fell to 138k, nearly 50k below median expectations, which like our own, had been bolstered by the weekly jobs claims, withholding tax, and the ISM. There is not a good month-to-month fit with the ADP report, but the strength of it yesterday, seemed to have precluded today’s downside surprise. Adding insult to injury, the back to back months saw jobs growth revised 66k lower.  

Moreover, the drop in the unemployment rate can largely be explained by the decline in the participation rate from 62.9% to 62.7%. This unwinds this year’s improvement in the participation rate, and brings it back to where it finished last year.  

Average hourly earnings rose 0.2%, which was in line with expectations. However, here the detail mars the constructive optic. The 0.3% rise reported in April was revised to 0.2%. This means that the year-over-year rate is unchanged in May at 2.5%.   

Although the euro has made a new high for year on the news, the Dollar Index has not made a new low (yet). The euro reached $1.13 in the immediate reaction to the US election last November. Options worth roughly 1.1 bln euros struck there expire today. US interest rates have fallen and the yield curve is flattening (2y-10y). Without higher US rates, it is difficult for the dollar to resume its uptrend. The market is also going to need evidence that the economy (and inflation) are recovering before becoming convinced that there will be a hike in September. It could also delay the timing of the Fed allowing some maturing issues to roll off in an attempt to shrink its balance sheet.