Dissecting the Jobs Report
The shockingly poor US employment data is bolstering bonds, while initial equity market gains have been reversed. It is weighing on the dollar, nearly across the board, and giving some of the accessible emerging market currencies a reprieve from the recent selling pressure.
The Fed’s Lacker (a non-voting hawk) tried playing up the drop in the unemployment rate to 6.7%, not far from the Fed’s 6.5% threshold. However, the market sees through it, as it reflects a decline in the participation rate (to 62.8% from 63%), matching the post-1977 low.
The data immediately sparked a debate about how much credence to give to the data. We take the middle road between those who say ignore it and those who argue that it is a sign of the continued fragility of the US economy.
First, whatever the cause, it was a North American phenomenon. Canada reported a nearly 46k decline in employment, which was driven by a 60k decline in full-time positions. The Bloomberg consensus called for a 14k increase in overall jobs. The Canadian unemployment rate jumped to 7.2% from 6.9%, while its participation rate was constant at 66.4%. The Canadian dollar has been punished for the disappointing data and, as a culmination of the recent economic data and official comments, the first whispers of a BOC rate can be heard.
Second, the main driver for the poor North American jobs data appears to be the weather. Some 250k US workers could not do their jobs due to the weather, which is the most for any December in 37 years. For the nation, it was the coldest December since 2009 and snow fall was 21% above normal.
Third, the weakness in the jobs report will have knock-on effects on many time series in the coming weeks. The decline in the work week is also consistent with the weather distortions, and will likely impact output. This may turn out to be a somewhat favorable development in the larger picture because of the large inventory build in Q3 and what appears to be a smaller build in Q4. This may help facilitate an adjustment that we had been anticipating.
Fourth, although the data likely surprised the Fed as much as investors, we suspect it will not alter the next round of tapering that is expected to be announced at the end of the month. Although the Fed clearly put more emphasis on the improvement in the labor market than in the low core inflation measures in last month’s decision to tapper, its statements on the labor market seem to reflect a view of a cumulative improvement, not simply a one-month data point of a notoriously volatile report (though until today’s report, the volatility as reflected by the proximity of short-term and long-term moving average had been low).
Fifth, being proven wrong in my expectation that the Fed was not going to taper in December has not eased my concerns. Like some others, we were concerned about low core inflation. Headline inflation has tended to gravitate toward core inflation in the US. Core inflation tends to gravitate toward wage growth. Year-over-year average earnings growth in the US was 1.8% in December, down from 2.0% in November. This is in nominal terms. Moreover, what’s really important is labor costs in conjunction with productivity. The bottom line is that inflation remains low and shows no signs of moving toward the Fed’s target.
Another concern of ours (and we thought of the Federal Reserve, as well) is the preference to maximize the forward guidance by allowing the new chair to articulate it and implement it. Given the unprecedented transition for the Fed, we also thought it desirable to let the next chair (who is often perceived to be a super-dove, or alternative, Bernanke’s third term) establish a strong reputation that could have been delivered by announcing the tapering itself. US Q3 GDP growth of 4.1% SAAR was strong, and other data has encouraged economists to revise up Q4 GDP estimates. However, today’s employment report confirms that there was no urgent need for the Fed to announce the tapering in December rather than in late January.
Six, the pullback in US yields is spurring a short-squeeze in the yen. The dollar is posting an outside down day against the yen, slipping to its lowest level since December 18. The 20-day moving average, which was flirted with earlier this week, comes in near JPY104.45 today. The dollar has not closed below that average for two months. The strength of the yen and the weakness of US equities, if sustained for the remainder of the session, will likely weigh on Japanese shares at the start of the new week.
The euro has rallied to its 20-day moving average ($1.3686), which also corresponds with a (38.2%) retracement objective of the decline from the December 27 high of almost $1.3900. The next near-term technical targets come in toward $1.3720-60.
The UK that had some disappointing data of its own today (industrial and construction output and BRC sales), but sterling has snapped back and is posting an outside up day. The bulls would like to see a close above yesterday’s high (~$1.6497) to confirm.
The Aussie has snapped back too and is testing the $0.9000 area that contained the attempt to bounce at the end of last week. The technicals look constructive, but many bears will likely be selling into additional upticks. People are not talking as much about euro-Aussie or sterling-Aussie crosses now. It is a US dollar move.