My Top 10 Takeaways from the US Jobs Report

Going into today's non-farm payrolls report, very few market participants expected a big reaction in the U.S. dollar and while the gains in the greenback post NFPs were small in comparison to what we have seen in the past, the jobs report blew out everyone's expectations. Non-farm payrolls rose 288k in the month of April, up from 203k. The most optimistic Wall St economists were calling for a 250k rise but what really caught the market by surprise was the sharp improvement in the unemployment rate, which fell to 6.3%, its lowest level since September 2008. At best, economists were looking for an improvement to 6.5% from 6.7%. The report would have been unambiguously positive for the dollar if not for the drop in the labor force participation rate, which indicates that the only reason why the unemployment rate declined was because 806k people dropped out of the work force. Average hourly earnings also stagnated so for the time being no there's major risk of inflation.

In other words, don't expect today's non-farm payrolls report to change the Federal Reserve's stance on monetary policy. Everyone will be looking to next week's speech by Janet Yellen for indications on whether the improvement in the unemployment rate will accelerate the central bank's plans for tightening and unfortunately we think that the answer is still no. Internally, policymakers may consider pulling forward their rate hike plans but these views will not shared publicly because of the upside risk they pose to yields. Job growth was very strong and the unemployment rate declined but Yellen will most likely downplay the improvement by saying that tapering does not equal tightening. When she delivered her first post monetary policy meeting press conference, she said rates could rise 6 months after QE ends. If the central bank continues its current pace of tapering, asset purchases should reach zero by October or December at the latest and 6 months after that would be sometime between April and June which is right in line with current market expectations. Given the drop in labor force participation and zero wage growth, there's no reason for the Fed to ramp up expectations for tighter monetary policy. In fact, it would be in their interest rates to keep rates low to encourage workers to return to the workforce.

The post NFP rally in the USD/JPY stopped short of the 103 resistance level in USD/JPY and 1.38 support in the EUR/USD. While these levels could be broken in the coming week we don't expect significant gains beyond that.

Top 10 Takeaways from US Jobs Report

1. Not a Game Changer for Fed Since Labor Force Participation Down and Wage Growth Flat
2. Flattening of yield curve post NFPs - Means USD Rally Limited
3. Rate Hike Expectations Pulled forward to June 2015 form July 2015 - No big deal
4. Non-Farm Payrolls 288k vs. 203k - Strongest since Jan 2012
5. Unemployment Rate 6.3% vs. 6.7% - Lowest since September 2008
6. Labor Force Participation Rate drops to 62.8% from 63.2% - Improvement in unemployment rate caused by shrinking workforce (806k people dropped out)
7. Broader U-6 Unemployment Rate drops to 12.3% from 12.7%
8. Average Hourly Earnings Stagnates - No Wage Growth
9. Manufacturing Employment grows 12k from 7k
10. ***Yellen is speaking next week, she will most likely repeat tapering does not equal tightening