The Dollar and US Payroll Data: Analyst Reactions

-US payrolls rise 164k in March, below 190k consensus.

-US unemployment falls to 3.9%, lowest since year 2000.

-Wages grow just 0.1%, below consensus for growth of 0.2%.

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The US Dollar strengthened during the noon session Friday as markets responded to a mixed labour market report for the April month, which saw the unemployment rate hit a fresh 18 year low but jobs and wage growth disappoint.

US non-farm payrolls rose by 164,000 during the April month, up from 103,000 previously, when markets were looking for jobs growth of 190,000. Wage growth also disappointed too, with average pay packets rising just 0.1% when economists had forecast earnings growth of 0.2%.

On a more positive note, the US unemployment rate fell 20 basis points to 3.9% when markets had been looking for a lesser decline to 4%. This is the lowest level since the year 2000 although much of the excess decline is thought to have resulted from a change in the participation rate. 

Markets care about the payrolls and wage growth numbers because of the impact that falling unemployment and rising pay can have on demand within an economy and, therefore, on inflation too. It is inflation that central banks are attempting to contain when they raise interest rates so, traditionally, a strong payrolls number would add to the case for further rate hikes and be bullish for the Dollar. 

Friday's data also comes at a time when the Dollar has been energised by a sharp rise in American bond yields, which has helped boost the attractiveness of the US currency relative to others. This is thought to be the result of rising inflation, a robust US economy and investor concerns over President Donald Trump's budget-busting tax reforms that have seen the US Treasury tapping markets for ever larger amounts of new debt.

At the time of writing the US Dollar index is quoted 0.34% higher at 92.75 with the Pound-to-Dollar rate 0.35% lower at 1.3522 and the Euro-to-Dollar rate 0.48% lower at 1.1929.

The greenback also notched up gains over all other developed world peers barring the Japanese Yen.

While the Dollar's advance is continuing Friday, it remains to be seen whether it will endure for much longer. Analysts give their views below on what they think about the afternoon's jobs report and where the Dollar may head next.

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Analyst Views: 

Andrew Grantham, economist, CIBC Capital Markets

"After the highs and lows of the prior two months, payroll growth settled to a more trend-like pace in April. The 164K gain in jobs for the month was a little below the consensus, but adding cumulative revisions of 30K to the figure puts us broadly in line with expectations."

"The unemployment rate falling to 3.9%, from 4.1%, was partly driven by a tick lower in the participation rate. The main surprise was on the wages side, which continue to show little in the way of acceleration despite how low the jobless rate is."

"With one more jobs report due before the Fed's June decision, these figures shouldn't alter expectations too much for a hike at that time. However, they do seem to confirm our view that there's no need to expect a faster pace of hikes going forward given inflationary pressures remain relatively tame. Slightly negative for the US Dollar and positive for fixed income." 

 

Michael Pearce, senior US economist, Capital Economics

"With the unemployment rate hitting an 18-year low of only 3.9% in April, the Fed is still going to push ahead and raise interest rates again in June, even though average hourly earnings growth remained at a muted 2.6% y/y."

"The alternative household survey showed a trivial 3,000 increase in employment, but the unemployment rate still tumbled to 3.9%, the lowest level since 2001, as the labour force shrank by 236,000. That is only a whisker above the 3.8% trough it hit in 2000."

"In those circumstances, the Fed isn’t going to be too troubled by signs that average hourly earnings increased by only 0.1% in April, which left the year-on-year rate at 2.6%."

"Alternative measures of wage growth, particularly the employment cost index, continue to trend higher. Accordingly, we still expect the Fed to press ahead and raise rates again in June, and a total of four times in 2018."

 

Ian Shepherdson, chief US economist, Pantheon Macroeconomics

"In one line: Payroll trend is solid; unemployment heading for 50-year lows...The dip in unemployment is due to a reported 236K fall in the labor force rather than the rebound in household employment that we expected; it rose only 3K and is now trailing well behind recent payrolls."

"This won't last, and as household employment catches up, unemployment will fall further. April's 3.9% rate was the lowest since Dec 2000, and unemployment hasn't been below 3.8% since 1969."

"Looking ahead, the wobbles in the ISM employment numbers for April and NFIB hiring intentions, if they persist, cast something of a cloud over payrolls from mid-year onwards, but one month's soft data proves nothing. As of now, the three-month average payroll gain is 208K, better than the 182K average for the whole of 2017."

 

Rhys Herbert, economist, Lloyds Bank

"Today’s labour market report once again painted a mixed picture."

"The data are unlikely to lead to any change in the US central bank’s policy intentions. One message from today’s report is that the labour market remains buoyant and the majority of Fed policymakers will almost certainly see it as consistent with a continuation of its policy of raising rates “gradually”."

"A 0.25% interest rate hike at the Fed’s June policy meeting seems almost certain, barring a major economic shock over the next few weeks, with at least one further increase to follow in the second half of the year. However, the deceleration in wage growth will be seen as disappointing and argues against the Fed significantly picking up the pace at which it is raising interest rates."

 

Paul Ferley, assistant chief economist, RBC Capital Markets

"The larger-than-expected reported drop in the unemployment rate to 3.9% from 4.1% provides additional evidence of tightening labour markets. This rate is significantly below what the Fed has characterized as full employment within a range of 4.3% to 4.7%."

"Tightening labour markets argue that the current highly stimulative monetary conditions are no longer warranted and reinforces our forecast that the fed funds range, currently at 1.50% to 1.75%, will continue to be hiked 25 basis points each quarter through next year finishing 2019 at 3.25% to 3.50%."

 

Alexandra Russell-Oliver, analyst, Caxton FX

"Today’s prints are unlikely to change market expectations that the Fed will hike interest rates next month, a move that has already been priced in. But equally the data will do little to pressure the Fed into raising rates any more quickly than currently projected.”

 

Knut A. Magnussen, strategist, DNB Bank

"A weaker than expected outcome for employment, but still solid growth at 164k. However, one should expect somewhat slower growth so far out in the cycle and the trend is still strong. With unemployment down to 3.9% the Fed will most likely hike again at the June-meeting, despite the still low wage growth...Marginal market impact, as weaker than expected employment was counteracted by revisions and the larger than expect drop in unemployment." 

 

 

 

Analyst Previews: 

 

Derek Halpenny, European head of markets research, MUFG

"The fear of a global trade war is one area of angst for investors while another is the potential for inflation to suddenly lurch higher and force the Fed into a faster pace of tightening. In that context, the non-farm payrolls report this afternoon will be another important event for shaping current sentiment."

"Given the fears of higher inflation and what that means for the Fed, it will be the hourly earnings data that will determine financial market reaction. But, with equity markets so fragile, it is not clear how the dollar would respond to a strong wage print. USD/JPY for example looks vulnerable and we see further declines over the short-term given the fragility of US equity market sentiment."

 

Mark McCormick, North American FX strategy, TD Securities

"All eyes on US employment data today. FX will look to this for directional cues with a particular emphasis on the wages data. After an extended move in several bilateral pairs, speculation has grown as to whether the latest USD rebound has become stretched enough to fade. Indeed, the USD has reached "overbought" levels on nine of the G10 currencies in recent days. Only USDCAD has lagged this development."

"TD looks for an above-consensus 210k increase in nonfarm payrolls (market: 192k), reflecting a return to the near-term trend. This should be sufficient to push the unemployment rate to 4.0%, while wage growth should hold steady at 2.7% y/y - both in line with consensus."

 

Petr Krpata, chief EMEA FX strategist, ING Group

"We look for a rebound in NFP from the disappointing 103k seen in March to 200k, with wage growth to remain at a solid 2.7% YoY and the unemployment rate to decline to 4.0% (see NFP Preview for details). All this reflects the solid state of the US economy and it being essentially at full employment, further pointing to the Fed’s trajectory of three hikes this year and more to come next year."

"However, as the non-negligible degree of tightening is already priced in and our expectations for today’s labour market are not vastly different from the consensus, we don’t look for a material USD upside. If anything, we don’t see the current dollar rally as a beginning of the trend. Instead, we view the dollar move as exhibiting classic signs of a counter-trend rally and still look for USD weakness in later part of the year and in 2019."

 

Antje Praefcke, analyst, Commerzbank 

"The dollar on the other hand cannot complain about a lack of solid fundamental data, as today’s labour market report is likely to confirm. The unemployment rate is likely to have fallen further and at 4.0% is likely to be well below the natural unemployment rate assumed by the Fed of 4.5%."

WThe rise in new jobs, which was distorted the previous month as the result of special effects, will normalise once again. Despite the increasingly tight labour market the creation of almost 200k jobs a month, as was the case on average over the past six month, remains very decent."

"Everything all told the Fed will feel confirmed in its approach as a result of April’s labour market report. Following two weeks of heavy losses - as EUR-USD eased from 1.24 to below 1.20 - we might see a desire for consolidation at the end of the week, causing EUR-USD to get stuck in the area of 1.20, regardless of disappointing inflation data from the euro zone and the positive data from the US."

 

John Hardy, chief FX strategist, Saxo Bank 

"Risks of a surprise in the data are large given the nature of its calculation. This data point and the weekly close should set in motion whether the week finishes with a bang for the USD rally, potentially setting up another 2-3% or more of upside before resistance comes in, or whether these latest key levels across major USD pairs will remain intact."

"The rally is still largely intact outside of doubts around USDJPY as we look to the Average Hourly Earnings data and whether it makes fresh waves in Fed expectations or the longer end of the curve. (that 3.0+% level on the 10-year benchmark)."

 

Robin Wilkin, cross asset strategist, Lloyds Bank

"It would need to be a truly shocking miss to see a market reaction. With inflation starting to reach the Fed’s 2% target, but recent data not enough to shift them away from their current path of two more hikes this year, it would take a significant pick-up in wage growth to trigger the market to ‘price-in’ closer to three more hikes this year. So far, wages have picked up only modestly despite a seemingly tight labour market, but there are now tentative signs of acceleration."

 

Boris Schlossberg, managing director, BK Asset Management

"As always, wages will be the much greater focus and if that data point could show a beat then it will likely offset any negative news on the job front. Forecasts, however, are muted and a rise of 0.2% or less will not shift the market expectations regarding wage-price inflation."

"Ahead of the report USDJPY remains contained at the 109.00 figure after yesterday's fail to break out above the key 110.00 level. The 108.00-110.00 corridor remains critical to the pair. A break above 110.00 would cement the dollar rally and likely force a wave of short covering as the pair would open a new leg in its uptrend. A woeful number, however, could push the pair below the key 108.00 support and destroy the technical foundation for the recent rally."

"Any dollar weakness may not necessarily translate into euro and cable strength as both pairs are being hit by risk aversion flows. Indeed, a weak US NFP print could trigger risk aversion selloff across the board as capital markets begin to price in the uncomfortable possibility that global growth may have peaked and that we are now in synchronized slowdown across the G-11 universe."

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