What the April NFP Report Might Mean for Fed Policy

And the numbers are in! After printing dismal results for March, the U.S. jobs report for April showed a pretty decent comeback and is probably enough to confirm the FOMC’s claim that the recent hiring slowdown was just temporary. Now what could the latest employment figures mean for a potential Fed rate hike and the U.S. dollar’s forex price action? Here’s a quick rundown of the takeaways from the April NFP report:

Headline figures in line with expectations

The U.S. economy added 223K jobs in April, closely in line with analysts’ expectations of a 224K increase and enough to bring the country’s jobless rate down from 5.5% to 5.4%. For most forex market watchers, anything above 200K is positive for the dollar as this represents healthy above-average jobs growth.

While the U.S. has fallen short of resuming its impressive streak of better-than-expected employment gains, it’s still worth noting that the unemployment rate has dropped to its lowest level since May 2008 without any signs of fallout from the labor force. The participation rate actually improved from 62.7% to 62.8% in April, indicating that renewed confidence in job prospects has encouraged more Americans to resume their job hunt.

Revisions to previous releases

On a less upbeat note, the previous report was downgraded to show a mere 85K increase in hiring for March from the initially reported 126K gain. While the February NFP reading was upgraded from 264K to 266K, the combined revisions in previous releases amounted to a 39K reduction in employment.

However, forex market participants seemed willing to overlook these downbeat revisions since the Fed has already acknowledged the “transitory” slowdown in the economy. This goes to show that traders have already moved on from the disappointing readings and are more concerned about seeing a sustained recovery.

Improvements in other labor indicators

Several economists are seeing green shoots in underlying labor indicators, with positive trends signaling further strength in the jobs market. For one, the underemployment rate (U-6) dropped to 10.8% in April this year, marking a continuous decline from its 11.8% reading in the same month last year. Economic hotshots noted that this marks a faster pace of decline compared to the headline unemployment rate, reflecting steady improvement in the quality of job opportunities.

According to the Bureau of Labor Statistics, the number of long-term unemployed Americans (those that have been unemployed for 27 weeks or more) has managed to hold steady at 2.5 million instead of increasing. In addition, part-time employment for economic reasons has fallen by 125,000 while part-time employment for non-economic reasons surged by 325,000. This indicates that more part-time workers are taking those jobs by choice rather than being forced into taking odd jobs just to make ends meet.

Positive reaction from the U.S. dollar and equities

All in all, the April NFP report seemed enough to reassure market watchers that the recovery in the U.S. economy is still on track. The Dow index surged nearly 1.5% during Friday’s New York trading session while the S&P 500 and Nasdaq both ended more than 1% higher after the report was released.

Meanwhile, the U.S. dollar had a pretty volatile run when the markets got their first glimpse of the jobs report but still managed to end the day higher against most of its forex counterparts. Dollar bulls were able to breathe a sigh of relief knowing that the U.S. economy didn’t post back-to-back disappointments with its jobs data.

Fed to stay “patient” about policy changes?

Recall that Fed Chairperson Yellen specified that they want to be confident that labor market gains will continue before they consider hiking interest rates. While one good report may not be enough to guarantee that the U.S. economy has made it out of the rut and can be able to get back on track with better-than-expected hiring gains, policymakers can rest assured that the slump hasn’t worsened.

Some Fed officials such as Atlanta Fed President Dennis Lockhart say that more convincing signs of a labor market recovery are needed before they tighten monetary policy. After all, policymakers would also like to see stronger wage growth and so far average hourly earnings have fallen short with a mere 0.1% uptick instead of showing the estimated 0.2% increase for April. With that, the Fed is likely to retain its rate hike bias, although the actual time line might still be set for much later this year.