FYI | Oct 06 2012
Fundamental Update: NFP breakdown
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
The September labour market data was released on Friday. The headline payrolls number was roughly in line with expectations at 114k vs. expectations of 115k. The unemployment rate declined 0.3% last month to 7.8%. The unemployment rate was the big surprise, as the markets had been looking for a rise to 8.2%.
This report is the most significant report before the US Presidential election on November 6th, so today’s data was always going to be loaded with political importance. The decline in the unemployment rate is being considered positive for the Obama campaign and is attracting scepticism from Republicans. This makes future months’ data even more important than usual to see if the September data is the start of a trend or just a blip.
However, regardless of political rhetoric, traders need to know what the detail of the report means and what the market impact may be. Here are the key facts from the September report:
• The number of unemployed persons in the US decreased by 456k in September
• The number of persons unemployed for 5-weeks or less declined by 302k over the month, which tallies with the better initial jobless claims of late.
• Part-time employment rose by 600k in September
• There was a 235k decline in the number of “discouraged” workers – people not even looking for work – in the year to September.
• Long term unemployment remained steady at 2.5 million over the last year.
• Average hours worked per week edged up to 34.5 hours per week. Manufacturing hours edged up to 40.6 hours and factory overtime stayed the same at 3.2 hours.
• Average hourly earnings rose by 7 cents to $23.58, in September; the annual rate in wage growth is 1.8%.
• The number of people in the US labour force jumped by 873k, this reverses last month’s decline of nearly 200k and is one of the largest monthly jumps since the 1980’S.
What does this survey say about the strength of the US economy?
This is a fairly good report. The jump in the labour force is hard to explain, but there was solid job growth. Another positive point was the drop in discouraged workers. Although the headline drop in unemployment is good news, the detail of the report is not as heartening. The weak points remain hours worked and wage growth, which at 1.8% is still not keeping pace with inflation. This should continue to constrain the consumer. Added to this, the large number of part time jobs created does not suggest that robust economic and business confidence is developing in the US.
Thus, although this data is encouraging it is not as strong as the headline figure suggests.
The market impact:
This data seems to be considered positive for risk and we have seen the dollar fall sharply post the data release. Stocks are higher in both Europe and the US, while the USDJPY and gold are fairly neutral to slightly lower.
The market seems to be confused by this data. The decline in the gold price (which was a popular QE3 trade) suggests that the market may “believe” that the decline in the unemployment rate could be the start of a trend. However, we need more than one month’s data for this to be the case, so we may not see a directional bias in financial markets based on today’s data alone.
If we follow up this report with other strong US economic data then we may see the dollar start to strengthen and the gold price continue to decline. For now investors are willing to scale back their gold longs, and dollar gains seem to be capped, as the Fed remains committed to QE3. EURUSD looks poised to pop higher if Spain applies for aid in the near term and signs a memorandum of understanding to stick to economic reforms in the coming weeks (as requested by the ECB before it will activate its OMT programme). This could be enough to get us above 1.3175. Right now Spain seems like the biggest event risk for EURUSD, as we may trade in a 1.2950 – 1.3175 range in the next few days.
EURUSD: Daily
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