January NFP Data Post Analysis

January’s payrolls report is unambiguously positive. The headline payrolls change was much stronger-than-expected at 243K (consensus = 140,000; Markets.com = 135,000), and last month’s initial 200,000 release was not revised down as expected, but ticked up 3,000 to 203,000. Manufacturing payrolls rose by 50,000, much stronger than recent trends (and in contrast to the suggestion by the Mfg ISM employment index for January), and prior months have also been revised higher. The manufacturing gains were broad based. Their latest estimate, known to be a leading indicator of the Non-Farm employment change, came out below expectations at 170,000 jobs pointing to a weaker Non-Farm Payrolls (NFP) reading. ADP’s forecast, which excludes the farming industry and government, reported 95,000 jobs coming from small businesses versus to a negligible 3,000 jobs by large companies. Furthermore, the ADP’s December figure was revised down to 292,000 from 325,000 jobs reported.

Service sector employment in the private sector rose 176,000, and very strong by recent trends. And government jobs fell ‘only’ 14,000, a little slower than recently. But the pick of the data in this release is the household survey – the payrolls equivalent from which the unemployment rate is chosen. This showed a rise of 847,000, though adjusted for population effects to bring it into line with previous months, this falls to 216,000. Nevertheless, the net effect of this was to bring the unemployment rate down from 8.5% to 8.3%, the U-6 measure of unemployment and underemployment fell to 15.1%. In contrast to some recent months, this unemployment fall was mainly due to increased employment, and decreased unemployment, not a fall in the labour force, which actually rose by 508,000. The average duration of unemployment also fell by 0.7 weeks, though median unemployment duration was not much changed. There were positive signs in wages too, where average hours worked increased, although average hourly earnings growth remained 1.9%y/y.

With the labour market playing such a pivotal role in the Fed’s monetary policy strategy, the commitment of the Federal Reserve to keeping rates on hold until at least late 2014 is looking hard to take too seriously. At the current rate of improvement, the long run target for the unemployment rate of about 6.5% will be reached by early to mid-2013, and rates will still be 0.00%. Yesterday, Chairman Bernanke said the Fed was ‘mulling over’ further QE to speed up the recovery, but today’s data numbers could cause policymakers to step back as the Fed has already bought $2.3 trillion in bonds to keep rates low and spur the economy. The prospects, therefore, of a sell-off of back month Fed funds futures looks pretty certain if data continues along these lines.

Recent developments

The Federal Reserve, concerned about the elevated jobless rate and high number of unemployed citizens, it announced that it will maintain its benchmark lending rate near zero, up until 2014. This was a change from a previous announcement that it intended no alteration up until mid-2013.

The annualized GDP for the 4th quarter came out at 2.8%, which although less than expected, remains a solid figure. Increased Durable Goods Orders paired with a sturdy ISM Manufacturing PMI reading above 50, are two economic indicators of a strengthening business sentiment. This is of course promising readings for the US labor market that remains fragile.

Third round of quantitative easing

Employment in the world’s leading economy is expected to have expanded by another 145,000 jobs in January. In this case, the current recovery in the US labor market may boost the US dollar as such data will diminish the scope for a third round of quantitative easing. If and as the economic activity accelerates, the Federal Reserve is expected to lessen its dovish tone for monetary policy, and the nation’s central bank may choose to hold back and closely monitor economic developments throughout the coming months as the possibility of a double-dip recession fades away.

On the contrary, if we witness a deceleration in employment in the midst of a challenging world-wide environment, at the same time as fundamental outlook for US remains vague, Fed Chairman Ben Bernanke will keep highlighting the enduring weakness of the real economy. This will leave the door open to expand the central bank’s balance sheet further, and speculation for further quantitative easing will heighten. In this case, the attractiveness of the US dollar will dampen as the Fed’s policy persuades risk-appetite trading.