EMPLOYMENT LED RECOVERY MAY BE TAKING A REST!
Considering the disappointing jobs data which missed estimates by a large margin, the Fed will likely wait a few more months to get a true picture as to whether this result actually depicts a worsening employment situation in the US before making a decision as to when to raise rates. This is of course what investors expect, thus the reason for the USD weakening in line with the labor data disappointment.
The non-farm employment change report showed a mere 126,000 jobs added last month, missing estimates of 246k by a wide gap, marking the lowest level in over a year, however still in line with the 120,000 NFP averages. Some experts have attributed it to the harsh winter weather, regarding it as a likely temporary hitch.
If the data is checked carefully, we can see that there is a strong development in the US data and the unemployment rate in the US has fallen to 5.5% in line with the FED expectations, hence this could indeed be just a temporary stall in the numbers. We are still above NFP averages.
ADDITIONAL EVIDENCE FOR WEAKNESS IS REQUIRED
The NFP results showed a positive correlation with the ADP employment results released earlier in the week which also missed estimates by a substantial margin, coming at 189k, as against forecast of 227k.
According to Fed chair Yellen, she said in the last FOMC conference that the job market is expected to continue improvement, anticipating that the Central bank will commence rate hikes from its near zero level sometime this year, with subsequent increases being gradual, in accordance with the economic situation which is inline with The Fed’s promise of raising rates when it sees further improvement in the labor market and is confident inflation is moving back toward its 2% target.
Although, it should take a few additional months data to determine whether or not the weakness in the job report is a serious concern, potentially becoming a dent to the economic recovery. The recent recovery has been largely seen as employment led, hence the March report may add to concerns as other measures, such as retail sales and industrial production, have also been disappointing in recent months.
As to when the FED will hike the rates, last week Richmond Fed President Lacker said the Fed should raise rates in June, while Cleveland Fed President George said “the sooner we do it, the better.” If we go with Mr. Lacker’s comment before the Fed meets in June, it will see employment reports for April and May. Those reports could include revisions of the March data, showing more strength or weakness which would shed a light to the labor data.
UNEMPLOYMENT CLOSE TO NAIRU
On the other hand, unemployment rate was unchanged at 5.5%, remaining above the 5%-5.2% level regarded as the ideal NAIRU, which is the “non-accelerating inflation rate of unemployment” according to the Federal Reserve.
MARKET REACTIONS
The weakening of the USD against its counterparts should be based on technical developments and even due to the end of the Q1 as well.
It is important to note that the jobless claims for last week in March were the 2nd best data in the last 15 years. Nonetheless the relative disappointment of the last Friday does not mean that the trend has changed and the bulls have abandoned the USD.
Friday’s market developments in the absence of the European market participants could be viewed as a profit taking too, as majority of the European players were out of the market due to the Good Friday. Nevertheless we could see the USD bulls getting back on Tuesday as Europe returns back from the Easter holiday and the Greek fears hit the market once again.