Non-farm payrolls blew away even the best estimates by economists, driving the dollar sharply higher against all of the major currencies. No one including ourselves expected such a hot number. We have previous said that in order for the dollar to stage a long term recovery, U.S. growth needs to blow away expectations and the latest NFP numbers did just that. With job losses falling by only 11k last month, the U.S. economy is at the verge of returning to positive job growth. Based upon the consumer confidence numbers, the ADP report and the employment component of the ISM reports, it is hard to believe the accuracy of the latest non-farm payrolls figures. However the numbers provided are the only numbers that we have at hand and revisions will not be released until next month. Therefore taking the report at face value, the massive improvement in the labor market should create a medium term bottom in the U.S. dollar as long as risk appetite does not gain control of the currency market.
The latest non-farm payrolls figures suggests that the U.S. economy is not doing nearly as bad as everyone have feared. Many had assumed that the sheer magnitude of the recession would require a more disenchanting path of unemployment, signs that it is subsiding could indicate that the recovery will be more brisk and robust than previously thought. The drop in the unemployment rate from 10.2 to 10.0 percent suggests that joblessness may have finally peaked and the price action in the dollar reflects traders repositioning for stronger U.S. growth in 2010. Given that the Fed has never raised interest rates before a peak in the unemployment rate, the decline in November gives the Fed a stronger reason to speed up their timetable for an exit. The average weekly hours and wage data indicate that companies are forcing employees to work longer hours for an incrementally smaller increase in pay but this is not enough to erase the positive tone of the data. In our non-farm payrolls preview, we talked abuot how it typically takes an average of 2.27 months for job growth to return after a recession. Even though the official end of the recession is still debatable, if we use Bernanke’s estimates of a September estimate as a rough guide, then the U.S. economy is on track to return to positive job growth in December.
However, with the good news and excitement aside, the next question that comes to our minds is what this means for the Federal Reserve and its doctrine of keeping rates low for an extended time. Up until this point, no respectable economist would consider that rates would move anywhere until the second quarter at the earliest. In fact, the Fed has committed to little in terms of unwinding extraordinary measures, having only terminated the Treasury purchases in October. However, if a continued easing in unemployment indicates that we have indeed past the peak, history has shown that the Fed is inclined to start raising rates. Typically, the trough in employment is used as a barometer of when the Fed feels comfortable with draining excess money from the system. It remains to be seen how the Fed will react and a hike still seems months in the future, but today’s release definitely brings new possibilities to the table.
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