Non-Farm Payrolls Report: Good but not Great

Despite what appears to be a relatively healthy labor market report that showed U.S. companies adding 192k jobs last month and the unemployment rate dipping to 8.9 percent, the lowest since April 2009, the dollar failed to onto its initial gains against the Japanese Yen. The non-farm payrolls report is notorious for triggering significant volatility in the foreign exchange market and it has certainly lived up to its reputation this morning with the EUR/USD trading as high as 1.40 only to sink back below its pre-NFP levels. The problem is that February was a good but not great month for the labor market. Going into the non-farm payrolls report, everyone expected a strong number because of the weather related distortions that made job growth in January unusually depressed. A revision was also anticipated for the previous report but the size of the revision (from 36k to 63k) was nominal considering that severe storms prevented more than 700k Americans from working that month. As we said in our non-farm payrolls preview, job growth needed to exceed 250k in order for it to be unambiguously positive for the U.S. dollar. The improvement in the unemployment rate is encouraging and will make the Federal Reserve look good for finally bringing the jobless rate back below the psychologically hobbling 9 percent level. However it is bittersweet considering that the participation rate remained at a 25 year low, average hourly earnings were flat and average hours remained unchanged. If the participation rate was closer to its 25 year average of 66 percent, the unemployment rate would be over 11 percent. This of course will be lost in the headlines as everyone focuses on the 8.9 percent print. Yet we cannot ignore the fact that the Birth/Death adjustment also added 112k jobs to this month’s report.

But will it Change much for the Fed?

The key takeaway is that today’s non-farm payrolls report changes little for the Federal Reserve. Bernanke may be relieved to see another month of improvement in the unemployment rate, but given the underlying weakness of the report, the central bank will still argue that unemployment remains extremely high and therefore continued stimulus could be warranted. Given recent comments from Fed Chairman Ben Bernanke, the U.S. central bank remains on the fence about ending asset purchases in June. Despite the strength of today’s jobs number, the true trend remains unclear and even though the labor market is moving in the right direction, the Fed will need to see more consistency over the next few months before becoming convinced that the decline in the unemployment rate is an accurate reflection of the how the labor market is performing. It is important to remember that the central bank is far from meeting is dual mandate of maximum employment and price stability. Unemployment remains high and for this reason, the Fed will probably leave interest rates unchanged for most the year. In terms of QE3, the Fed doesn’t need to make their decision right now. They still have the opportunity to see 3 additional months worth of non-farm payrolls reports before making their decision. If the unemployment remains below 9 percent by June, then the central bank may feel confident enough to end their asset purchases. In the meantime, we cannot forget that the European Central Bank still plans to charge forward with raising interest rates as soon as next month with the Bank of England likely to follow. The prospect of higher interest rates in Europe and unchanged monetary policy in U.S. could make it difficult for any rally in the dollar to last.