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US Economy Bucks Government Shutdown as October NFPs Crush Forecasts

US Economy Bucks Government Shutdown as October NFPs Crush Forecasts

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- October NFPs surge by expectations, reigniting taper talk as US Treasury yields surge.

- Unemployment Rate increases one-tenth of one percent to 7.3% as expected.

- USDJPY surges back to ¥98.92, erasing most of yesterday’s steep losses.

The October US labor market report was delayed by one week thanks to the US government shutdown, and that’s about the only impact the government shutdown had on the labor market. The October NFP figure was the third strongest of the year at +204K, behind August’s +238K final reading and the impressive +332K reading in February.

The strength in the data comes as a surprise to the market as the headline forecast called for only a gain of +120K, despite the fact that several secondary labor market prints in recent days had suggested that the US labor market was resilient in October. Of note, both the ISM Manufacturing and Services indexes improved in October, with the Employment subcomponents suggesting improving in the labor market.

US_Economy_Bucks_Government_Shutdown_as_October_NFPs_Crush_Forecasts1_body_Picture_1.png, US Economy Bucks Government Shutdown as October NFPs Crush Forecasts

Regardless, markets are taking the news as a sign that the Federal Reseve will begin to taper QE3 sooner than later – perhaps December given labor conditions bucking expectations. US Treasury yields have surged on the day, and are acting in a manner indicative of rising taper expectations: the middle or “belly” of the yield curve is seeing yields increase the fastest (a notable shift has developed just from a few hours ago this morning). This has proven bullish for the US Dollar previously this year.

Here’s the data lifting the US Dollar and hurting risk appetite:

- Change in Nonfarm Payrolls (OCT): +204K versus +120K expected, from +163K (revised higher from +148K).

- Change in Private Payrolls (OCT): +212K versus +125K expected, from +150K (revised higher from +126K).

- Unemployment Rate (OCT): 7.3% as expected, from 7.2%.

- Participation Rate (OCT): 62.8% from 63.2%.

The data isn’t all around strong, however. The Participation Rate dropped to 62.8%, its lowest rate since 1978. This is not a strong sign of the underlying health of the economy – fewer and few Americans are participating in the labor market. Accordingly, the steady Unemployment Rate is a bit misleading. Nevertheless, as this is a demographic issue – one that can’t be solved simply by more or less QE – it shouldn’t serve as a major impediment to any Fed tapering plans.

USDJPY 1-minute Chart: November 8, 2013 Intraday

US_Economy_Bucks_Government_Shutdown_as_October_NFPs_Crush_Forecasts1_body_x0000_i1028.png, US Economy Bucks Government Shutdown as October NFPs Crush Forecasts

Charts Created using Marketscopeprepared by Christopher Vecchio

Following the data, the USDJPY soared from ¥98.07 to as high as 98.91, helping the pair recover nearly all of its steep losses from yesterday (the pair fell from a session high of 99.40 to as low as 97.61 over the course of five hours). The pair was trading at 98.69 at the time this report was written.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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