February US NFPs Surge, but US Dollar Walks Away Disappointed
- Headline jobs growth comes above +200K for the second straight month.
- US wage growth jumps to +2.8% y/y as Unemployment Rate decreases to 4.7%.
- Given the February ISM Services and ADP Employment reports, today’s headline NFP jobs data is a bit of a letdown.
The US labor force continued to show signs of strong growth in February, with the headline Nonfarm Payrolls figure coming in at +235K, easily beating expectations of +200K. The January reading was revised slightly to +238K from +227K; overall, however, the net-two month revision was only +9K.
While today’s reading of +235K is on the high end of estimates, it’s a bit of a letdown from our perspective given other data points ahead of the release. The February US ISM Services/Non-Manufacturing index increased to 57.7 (from 56.5 previously) while the February ADP Employment Change showed jobs growth of +298K – the best reading since April 2014. Using a 10-year rolling model, the ADP report and the ISM Services report account for 92% of the changes in the NFP figure (R^2 = 0.92), and, in sum, these proximal trackers of the US labor market were suggesting a pace of jobs growth north of +250K.
Other parts of the report painted an improving picture of labor force strength. The labor force participation rate edged higher, up to 63.0% from 62.9%, making the improvement in the unemployment rate (4.7% from 4.8%) and the underemployment rate (9.2% from 9.4%) all the more impressive. Wage growth held steady at +2.8% (after the January figure was revised higher), which matches what was seen in December 2016, at the time the highest rate of wage growth in seven-years.
It’s important to keep in mind that the US economy doesn’t need such strength in the headline figure to maintain the unemployment rate at its current “full employment” level. According to the Atlanta Fed jobs calculator, the US economy needs to add +109K jobs per month over the next 12-months in order to keep the unemployment rate at 4.8%.
As far as rate hikes are concerned, this report is a mixed bag. Fed funds rate expectations continue to price in a 100% chance of a rate hike when the Federal Reserve meets next Wednesday. However, the odds of a second hike in September dropped slightly (78% chance to 77% chance), and the odds of a third rate hike in December fell below our key threshold of 60% (60% chance to 58% chance).
More than what the Fed may do, what should prove more important is the timeline of fiscal stimulus expectations: tax reform and infrastructure spending hopes have been the primary drivers of inflation expectations (and thus US yields); without them, the US Dollar remains vulnerable.
Here are the data driving the US Dollar this morning:
- USD Unemployment Rate (FEB): 4.7% from 4.8% as expected.
- USD Change in Nonfarm Payrolls (FEB): +235K versus +200K expected, from +238K (revised higher from +227K).
- USD Labor Force Participation Rate (FEB): 63.0% from 62.9%.
- USD Average Hourly Earnings (FEB): +2.8% as expected, from +2.8% (revised higher from +2.5%) (y/y).
Chart 1: DXY Index 1-minute Chart (March 10, 2017 Intraday)
Immediately following the data, the US Dollar slipped back versus the Euro and the Japanese Yen, with the Dollar Index (DXY) falling from 101.92 ahead of the data to 101.49 at the time this report was written. EUR/USD traded from 1.0594 to 1.0649 around the data, while USD/JPY was less dramatic, easing from 115.36 to 115.14 (thanks to US yields holding steady).
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--- Written by Christopher Vecchio, Senior Currency Strategist
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