The US created 252k jobs last month, higher than the 240k expected. The November figure was also revised up to 353k, vs 321k; November job growth was at its highest level for nearly 2 years. There was more good news regarding the unemployment rate, which fell to 5.6% last month, the lowest level since June 2008.
Although the headline data is “good” for the economy, there is still a big problem – wages. Wage growth actually fell 0.2% in December, pushing the annual rate of growth down to 1.7% - the market had been expecting 2.2%. The November wage data was also revised lower to 1.9% from 2.1%. Annual earnings in the US are back at their lowest level since Q4 2012. So even though the US is creating jobs (good news), the jobs are low paying and the level of wage growth may not be enough to sustain the US economy.
Digging a bit deeper into the data, jobs gains occurred in professional and business services, construction, restaurants and bars, healthcare and manufacturing. Unfortunately, higher paying jobs in financial services, including accounting and book keeping actually declined last month, which offset last month’s increase.
The number of people working part time because they can’t find full time work remains at 6.8 million, which also suggests that the US jobs market remains fragile, even though companies are hiring at a rapid clip – 289k on average over the last 3 months.
Why NFPs may not be able to sustain USD uptrend
The immediate market reaction has been a stronger dollar; EURUSD is back below 1.18, while GBPUSD has backed away from 1.5150. The dollar index has made a fresh 12 year high on the back of this figure, however, the greenback could be vulnerable as yields have not followed suit. In fact the2 –year yield, which moves closely with interest rate expectations, has fallen on the back of the payrolls data. This is because lower wage growth suggests benign inflation pressure, which could delay the Fed’s first rate hike, currently expected at some time in Q2 or early Q3.
The concern that wage growth could make the Fed err on the side of caution this year was reinforced by the Fed’s Evans, who becomes a voting Fed member this year. He said that he doesn’t see a need to hurry a rate rise at the Fed. He also expressed concern about TIPs data - Treasury Inflation-Protected securities – essentially, securities whose principal is tied to the US CPI rate.
Currently, the 10-year US breakeven rate – the 10-year treasury yield adjusted for inflation – is at multi-year lows across the curve. While Evans is a noted dove, the fact he is concerned about weak inflation growth and his vote counts this year, makes us wonder if there could be a dovish shift at the Fed in the coming months.
Takeaway:
While the jobs growth is positive, the fact that wages aren’t keeping pace could keep the Fed on hold for longer than the minutes of the December meeting suggest. This could make the next few months interesting, and it remains to be seen if the USD uptrend can continue at the same pace if the Fed starts to sound wary on inflation.
For now the market is happy to ignore the wage data, but the big unknown to dollar bulls is how long this will last. Watch out for speeches from Fed members next week including Lockhart (neutral), Kocherlakota (dove) and Bullard (neutral|) to get a sense of the Fed’s view on wage growth and weak inflation pressures.
Figure 1: The US inflation woes
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