NFP Recap: Headline beats but wage growth weak – dollar regains footing

At first glance, Friday’s non-farm payrolls data for June far surpassed expectations at 222,000 jobs added against prior expectations of around 175,000. Additionally, May’s disappointing 138,000 figure was made slightly less disappointing by Friday’s upward revision to 152,000. Overall, however, the jobs report was mixed, as average hourly earnings came in lower than expected at +0.2% against a +0.3% forecast, and May’s +0.2% was revised down to +0.1%. These weaker wage growth numbers should exacerbate concerns that inflation may continue to lag. In addition, another less-positive aspect of the report was the unemployment rate, which ticked up to 4.4% against both the prior forecast and last month’s reading of 4.3%.

Fed Implications

The implications of this report are mixed. The fact that the headline NFP number surpassed expectations by a considerable margin provides confidence that the US employment landscape remains strong and average job gains over the past several months are indeed gaining ground. This supports further Fed tightening. Low inflation, however, still poses a challenge for the Fed. Lackluster wage growth as reported on Friday, intensifies that challenge and questions the Fed’s recently expressed confidence that inflation would pick up. From the market’s perspective, bets on another Fed rate hike this year actually decreased modestly in the immediate aftermath of the jobs release. At this point, monetary policy uncertainty continues to prevail.

Market Reaction

Like the NFP data release itself, the immediate market reaction was also mixed. The first knee-jerk reaction to the headline beat was a spike up for the US dollar. Then a whipsaw reversal occurred as the less positive aspects of the data were digested. Finally, the dollar regained its footing and surged once again. As is typically the case, gold took the opposite route. The precious metal first spiked down, then reversed higher, and finally continued to fall as the dollar rose. US equity markets took the headline beat and ran with it, rising in pre-market and continuing to surge after the open to pare losses from Thursday. USD/JPY reached up to hit key resistance around the 114.00 level as the dollar rose while yen demand faded.

Week Ahead

Looking forward to the week ahead, key currencies to watch will be both the noted USD/JPY pair as well as USD/CAD. Next week brings the highly anticipated Bank of Canada (BoC) monetary policy report and rate statement. Due in part to recent comments from BoC officials about a potentially impending rate hike, the Canadian dollar has been on a sharp climb, pressuring USD/CAD down to new lows. Current expectations are for a 25-basis-point rate hike by the BoC next week. If this is indeed to be the case, the Canadian dollar is likely to continue its rise against the uncertainty of the Fed-driven dollar, potentially pushing the currency pair down towards its next major support target at 1.2800.