The Non-Farm Payrolls (NFP) report released yesterday in the United States was the highlight of the trading week. As it turned out, the US economy added more jobs in December than the market expected, confirming the ADP number out two days earlier.
The US economy added 223k new jobs in December, more than the 200k expected. Also, the unemployment rate declined to 3.5% from the 3.7% expected.
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Naturally, markets reacted to the report immediately. The US dollar ended the day much lower as investors reacted to the NFP report and the ISM Services data released a bit later in the day.
The US jobs market remains resilient
A recession might be just around the corner, as shown by the ISM Services that moved below 50. But the jobs market remains resilient, as the services sector employment settled in the range of 180k jobs/month.
But there is a problem with yesterday’s conflicting data. On the one hand, the jobs market remains resilient. On the other hand, the services sector contracts.
The problem is that employment is a lagging indicator. As such, the positives out of yesterday’s job report should be taken with a grain of salt.
Unemployment rate declined
The Fed’s dual mandate means considering changes in the prices of goods and services and the evolution of jobs when setting the federal funds rate. As such, a declining unemployment rate keeps the Fed on track to tighten financial conditions.
But the market is forward-looking. It already knows that the jobs data is lagging; thus, it looks at other details that might offer some other clues regarding what the Fed will do next.
Wage growth continues to moderate
Perhaps the most important detail of yesterday’s report was the average hourly earnings. Wage growth continues to moderate, giving hope to investors that next week’s inflation data will show a further decrease in the prices of goods and services in the United States.
As such, the US dollar selloff seen in the last part of the trading day should be viewed as a reaction to investors preparing for inflation to fall more rapidly than initially expected.
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