NFP Analysis: America’s labor market is red hot, only weak inflation could dethrone King Dollar

• The US gained a whopping 528K jobs in July, far above expectations. 
• Strong wage growth adds to the notion of a 75 bps hike in September and is set to keep the dollar bid
• Only a drop in inflation could chang the course of the greenback beyond minor correction. 

Help wanted, and much more of it – that is what the Nonfarm Payrolls report tells markets about the state of the hiring in America. Contrary to most Nonfarm Payrolls reports, the verdict on this one is clear – a monster report. 

The US gained 528,000 jobs in July, more than double the early expectations of 250K, exceeding any upgraded expectations based on leading indicators – and on top of upward revisions. July's gain comes on top of 26,000 additional jobs updated for June.

Despite rapid hiring, wage growth accelerated. It rose by 0.5% MoM in July, above 0.3% projected, and 5.2% YoY, beating early estaimtes for 4.9%. The only downside is a 0.1% slide in the participation rate to 62.1%. Neverhteless, the US is just 32,000 jobs short of pre-pandemic employment. 

The impressive report seemed to have pushed away recession fears – at least for now – and substantially increased the odds for a third triple-dose rate hike by the Federal Reserve. The odds for a 75 bps hike in September are now around 60%, up from 40% before the NFP. 

The boost to Fed expectations means a stronger US dollar. Will it last? First, some of the immediate reaction to the NFP tends to revert before the weekly close and this report is unlikely to be different. Nevertheless, I expect the greenback to hold onto more ofthe  its gains. 

For stocks, good news is bad news – investors are focused on higher interest rates as discounting future valuations. However, markets have shown a new/old tendency to buy the dip and they may change their narrative. A strong US economy means higher corporate earnings. 

What's next? The next big release is the Consumer Price Index (CPI). The fall in gasoline prices has undoubtedly pushed headline CPI lower, but there is uncertainty about Core CPI. If underlying inflation finally falls, it could change the narrative and send stocks higher and the dollar lower. 

However, until that publication, the dollar is set to remain on top.