All the optimism about the U.S. recovery that we have seen in the past few weeks have been erased by the sharp decline in non-farm payrolls last month. Many traders were positioning for a positive NFP report and job growth did return - but unfortunately it happened in November and the increase was modest. November non-farm payrolls was revised higher from -11k to +4k, reflecting a pickup in hiring before the holidays. However in an environment where 4.8 million people are claiming unemployment benefits, 4,000 new jobs hardly reflects a turnaround in the labor market, particularly if it is followed by 85k job losses in December.
The price action in the currency market following the NFP number indicates that traders were sorely disappointed by the release. The U.S. dollar fell aggressively post payrolls and the weakness should last since the only reason why the dollar recovered in December was because November's NFP report pointed to an accelerating U.S. recovery, leading traders to believe that NFPs would improve once again. However not only have job losses continued but the pace of attrition accelerated. The unemployment rate remained unchanged at 10 percent but the 590k decline in household employment indicates that it would have been higher if not for workers dropping out of the labor force. A closer look at the NFP number reveals the biggest job losses in private goods producing and construction sectors. The only sectors that reported job growth were temporary hiring for business services, education and health care. Average hourly earnings increased by 0.2 percent while average weekly hours remained unchanged.
The disappointing release should have a lasting impact on the dollar because it will force traders to pare back rate hike expectations. Federal Reserve officials have already been very cautious and repeatedly warned that interest rates will stay low for a long time. Traders previously shrugged off their warnings but now they will heed them.
Comments