NFP Recap: Not as bad as it looks

As the monthly tradition dictates, traders eagerly awaited today’s US jobs report with the (lack of) patience of a kid on Christmas. When the report was finally unveiled, it was by no means the anticipated “Red Ryder Carbine Action 200-shot Range Model air rifle with a compass in the stock and "this thing which tells time" (a sundial)” that Ralphie Parker desperately wanted in the classic 1983 film “A Christmas Story,” but it’s hardly as disappointing as some have made it out to be.

Overall, the US economy created 151k jobs in January, below the consensus estimate of 190k jobs, and roughly in-line with our model’s 160k estimate. The revisions did little to take the edge off the disappointing number of jobs created, with a net subtraction of -2k jobs from the previous two months’ reports.

While the overall quantity of jobs was certainly a disappointment relative to some traders’ expectations, the quality of this jobs was much stronger than we’ve seen of late. Specifically, the average hourly earnings figure rose 0.5% m/m, above the 0.3% rise expected and the highest month-over-month wage increase we’ve seen since 2006! On a year-over-year basis, wages rose 2.5%, well exceeding the rate of inflation. We also saw average weekly hours edge upward to 34.6 hours from 34.5 last month.

In fact, some have argued that today’s employment report is the first sign that the massive “slack” in the labor market is finally dissipating. In other words, we should expect job creation to downshift slightly and wages to rise sharply in a “tight” labor market. We don’t necessarily want to read too much into a single month’s jobs report (especially when last month’s release showed the exact opposite situation – high job growth and low wage growth), but it definitely bears watching as we move through H1 2016.

In terms of Federal Reserve policy, today’s report is unlikely to tip the scales meaningfully. Despite the most recent “dot chart,” we believe that a rate hike in the March FOMC meeting is highly improbable given the ongoing market turmoil and concerns about slowing global growth. At a minimum, it suggests that the Fed Funds futures market’s implied forecast of zero rate hikes at all this year may still be proven overly pessimistic.

Market Reaction

In handicapping the market’s reaction to any big release, it’s critical to consider the recent context. In this case, the US dollar was in the midst of its worst week in years and was deeply oversold on a short-term basis. Therefore, dollar bears were looking for any reason to take profits ahead of the weekend, and because today’s jobs report wasn’t unanimously awful, we’re seeing a bit of a bounce back in the world’s reserve currency. After briefly spiking to nearly 1.1250, EUR/USD is now trading down around 100 pips to 1.1125, while USD/JPY is also tacking on around 100 pips from its low to 117.30.

The reaction in other markets is more nuanced. On the commodities front, both oil and gold have taken a turn for the worse based on the dollar’s strength. Meanwhile, the yield on the benchmark 10-year treasury bond is rising to 1.89% as we go to press. Whether these moves continue into next week remains to be seen, but it’s clear that today’s jobs report was not as bad as it appeared at first glance.