The US monthly non farms payrolls and unemployment rate report our Friday morning EST was an unqualified victory for QE, the USD, and risk appetite. Not only were expectations beaten, the improvement was widespread in the detail as well as the headline figure, and occurs within the context of an already bottoming USD.
Here are the key points:
- The U.S. adding 216k jobs in the month of March vs. 191K expected a 14.65 % beat: That’s impressive in its own right, all the more so because the additions were from the private sector. The US government CUT 14k jobs in March, while the private sector ADDED 230k jobs.
- That’s added good news for the US deficit, because remember, government jobs consume tax revenue, private sector jobs create tax revenue.
- The unemployment rate also beat expectations (8.8% vs. 8.9%) falling to its lowest level in 2 years: Again, impressive by itself, all the more so because it came despite overall labor market participation rose too as more Americans feel optimistic enough to renew their search for work. This expanding labor force participation makes that reduction in the employment rate harder to achieve, and thus even more significant.
- The big growth came in the key service sector: While the manufacturing sector’s job growth creation slowed to 17k new jobs (vs. 32k in February), the service sector, which is by far the larger and more important of the two, increased its rate of job creation.
The details were also good:
- In just 4 months, the unemployment rate has fallen a full percentage point from 9.8 to 8.8 percent.
- Average weekly hours held steady but last month’s number was revised higher.
- Earnings growth was stagnant but markets were justifiably happy that more people are finding jobs, as wages shouldn’t be increasing until the jobless rate falls lower and gives employees more bargaining power.
Understand that these gains still represent slow job creation (the US needs about 195k new jobs/month just to keep up with growth in the workforce) that won’t make much of a dent in the over 8 million jobs lost over the prior years.
However, perceptions are everything in financial markets, and those perceptions just got a jolt. In particular:USD RATE INCREASE EXPECTATIONS REVISED HIGHER
In recent weeks, there has been growing support within the Federal Reserve to start withdrawing stimulus and the latest NFP report only reinforces the arguments favoring tighter monetary policy, even from the more dovish (anti-rate increase) members like Bullard.
Why? Continued evidence of recovery, a weak dollar, and high commodity prices has made central bank officials more both more optimistic about U.S. growth and also more concerned about inflation and asset bubbles.
The key takeaway from Friday’s US jobs report is that the labor market is improving and as a result:
- The Federal Reserve will most likely not continue asset purchases beyond June.
- Markets must revise their expectations higher for USD rate increases, because jobs and spending data are the 2 key metrics the Fed is using for deciding the extent and pace of stimulus exit and tightening.
- The USD is more likely than ever to start rallying.
- While the EUR is expected to be raising rates within the coming week, much of that increase is already priced into the EUR. It’s the USD that now has the bullish surprise new fundamentals on its side.
- The JPY repatriation story is fading, so is that of GBP rate increases as both Japan and the UK face new economic challenges, while the US outlook is improving
The above news is good for risk assets in general, but most directly benefits the beaten down USD. Indeed, the USD is so oversold that it is now especially sensitive to any positive news, and it just received a huge dose of good data.
In addition, the ongoing crises in Japan, the EU, and MENA region are not improving. Markets have ignored them over the past week, but that could change and any rise in risk aversion would likely further compound the USD’s bounce.
From a technical perspective, despite the rise in risk appetite reflected in major stock indexes, EURUSD is finishing the week down from the prior week, suggesting a continued bottoming that may now be ready to reverse given the new fundamental driver of an improving USD outlook.
Thus over the coming days, barring any negative USD surprises, the USD is likely to be trending higher, thus:
- The EURUSD and GBP USD are likely to be trending lower
- The USDJPY is likely headed higher
- Spot forex traders can trade these pairs directly
- Those without spot market forex accounts can play these via the related ETFs, for example:
- The USD: Go long UUP
- The EUR: Go long the EUR short etf: EUO, OR short FXE
- The GBP: short the long GBP etf: FXB
- The JPY: short the FXY, JYF
- Binary option traders are likely to do best buying puts on the EURUSD and GBPUSD, and by buying calls on the USDJPY.
For further detail, watch for our coming weekly preview articles at: globalmarkets.anyoption.com. Also, for guidance on how to monitor these trends, check out our latest trader training videos on Double Bollinger Bands at: http://www.youtube.com/my_videos?feature=mhum
Disclosure & Disclaimer: the above is purely for informational purposes, all trading decisions are solely the responsibility of the reader. The author is short the EUR for his private portfolio.