NFP Quick Analysis: Dollar buy opportunity? High wages, low jobless rate boost chance of March hike

Don't look up, but rather under the hood – for a second month in a row, the headline Nonfarm Payrolls badly disappointed with an increase of only 199K. An upward revision worth 39K for November doesn't improve that picture. However, other data look much better. 

The unemployment rate dropped to 3.9%, not only better than expected but also an excellent figure in absolute terms. That comes on top of an increase in the participation rate to 61.9%. These figures are nearing pre-pandemic levels of 3.2% and 62.8%, after months of muddling long. Moreover, the U-6 underemployment rate – aka "real unemployment rate" – dropped from 7.7% to 7.3%. 

Secondly, and more importantly for the dollar and the Fed – wage growth is super-strong. Average hourly earnings rose by 0.6% in December and 4.7% yearly, both substantially beating estimates. That implies inflationary pressures remain robust/ 

Lift-off is coming – the Federal Reserve's meeting minutes revealed an urge to begin raising rates soon. How soon? Nonfarm Payrolls figures for December may have sealed the deal, showing inflationary pressures via wage growth and robust revisions. 

The Fed's minutes – which also alluded to squeezing the bank's bloated balance sheet – already pushed the greenback higher ahead of the release. That implies a short-term profit-aking move against the dollar. Moreover, ADP's private-sector jobs report showed a whopping increase of 807,000, raising real expectations – aka the "whisper number" to elevated levels. That implies a "buy the rumor, sell the fact" response.

When zooming out, the concluding NFP release for 2021 paints an impressive picture of job growth, higher participation and salary increase. In other words: full employment is almost here. With that in mind, investors will likely cement a rate hike in March – and already begin speculating about further moves.

Will the Fed only let maturing bonds expire without buying new ones? Such a "natural roll-off" would be a light version of tightening. Or, would the bank consider actively selling some of its pandemic-era purchases, pulling money out of markets? The mere thought of Quantitative Tightening – accelerated by this jobs report – would likely boost the dollar. 

The Fed has two mandates, employment and inflation. Solid job growth and rising wages mean aggressive tightening. That holds true even if next week's inflation report falls short of the 7% now projected by markets.