Although today's nonfarm payrolls came in less than the 100,000 mark, they support our forecast for further temporary dollar gains into the rest of the year.
The unchanged 4.7% unemployment rate in the November payrolls report is the lone positive component of a predominantly weak data set. Payrolls rose by 94,000 from an upward revised 170,000 in October (initial at 166,000) and downward revised September figure to 44,000 from 96,000. The figure was closer to our 90,000 forecast versus consensus of 85,000. The stronger than expected 0.5% increase in average hourly earnings is likely to prevent the Fed from going for the more aggressive 50-bps cut option, due to upside price inflationary pressures.
Retail jobs showed a net increase of 24,000 after three-consecutive down months. Pre-holiday hiring must be the factor as November retail jobs consistently produced a net increase over the past three years. The erosion in construction jobs worsened, with a 24,000 net loss, making it the ninth down month over the past 12 months. Manufacturing lost a net 11,000 from a loss of 15,000, adding the number of straight negative months to 17.
Services added a net 127,000 jobs, less than the 192,000 in October and less than the three-month average of 134,000. Hospitality, professional/business services and education showed weaker job creation. The Government continued to fill the void with the creation of 30,000 jobs following 39,000 in October, overshooting the three-month average of 25,000.
With payrolls falling below their three-month average in seven of the last 12 months, and coming in under 100,000 in five out of the last six months, the labor market is increasingly showing signs of a recessionary environment. Once retail jobs remove their seasonal pre-holiday shopping hiring, we do not expect the void to be filled in, manufacturing, construction or finance related jobs. This is likely to nudge up the unemployment rate to 4.8%, in line with past Fed easing cycles. Said differently, today’s payrolls report supports the notion that the Federal Reserve will be facing macroeconomic reasons for further rate cuts, beyond just financial market-related factors such as credit defaults an liquidity.
The currency implications are less straightforward, with the dollar expected to amass gains on end of year repositioning and emerging signs of cooling overseas. The euro may present the last bastion of dollar weakness thanks to the ECB’s inflation vigilance. But emerging signs of a growth contraction in Spain and Italy will likely temper bullishness in the single currency and further complicate the central bank’s anti-inflation focus. The jobs report reduces the case for a 50-basis point rate cut as a 25-bp rate cut may be dollar positive from a reaction perspective (less yield erosion) and from a risk appetite perspective as stocks will likely resume their sell-off on disappointment of a less aggressive rate cut.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
