If you were looking for clarity on what the US Federal Reserve Bank will do later this month with regard to raising interest rates, you lost.

The US jobs report released Friday morning came right down the middle offering no clear indication of where the economy is going. The unemployment rate posted a larger-than-expected drop, falling to a seven-year low of 5.1% in August, down from 5.3% the previous month.

Fed building, Washington, DC
Fed building, Washington, DC

This decline would boost the Fed’s view that inflation will soon heat up, providing a good excuse to raise rates.

On the flip side, the US Labor Department said nonfarm payrolls rose a seasonally adjusted 173,000 in August, coming in below the 218,000 monthly average recorded between January and July. This would give weight to the case that the economy is already slowing and that a rate hike would hurt it worse.

However, the Labor Department is renowned for revising August higher. And the new report revised the June and July jobs reports to add 44,000 new jobs.

While economists called the report a “coin flip,” suggesting the Fed could go either way, US equity investors obviously believe this won’t stop the Fed from raising rates and they didn’t like it. In midday trading Friday, the S&P 500 Index fell 1.4% to 1,924 and the Dow Jones Industrial Average sank 1.6% to 16,121. The Chinese benchmarks, the Shanghai Composite Index and the Hang Seng Index closed mildly lower before the report came out.

Asia Unhedged doesn’t know which way the Fed will move, but we’ve been against a rate hike from the beginning. We think deflation is the big economic risk of the moment, not inflation. Well, deflation and the Fed’s fundamental misunderstanding of the state of the US economy.

If a rate hike comes, Asia Unhedged predicts a nasty correction in the US market, worse than what we’ve already seen. And that will have a negative ripple effect on China’s A-shares and H-shares.

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