Nonfarm Payrolls Data Disappoints, but USD Doesn’t Care

The much-awaited Nonfarm Payrolls report released by the US Labor Department on Friday showed that the US economy had added way fewer jobs than expected, mainly because of a major decline in government employment.

Nonfarm payrolls rose only 194,000 in September, while economists expected 500,000 new jobs, as we previously reported. Government payrolls tumbled by 123,000, while private payrolls rose 317,000. This is the slowest job growth in 2021, and it doesn’t bode well for the US economic recovery. The August reading was revised upward to show 366,000 positions added instead of the 235,000 jobs reported initially. Employment is 5 million below the record in February 2020.

The good news is that the unemployment rate dropped to 4.8%, better than the expected reading at 5.1%. Also, average hourly earnings jumped, which is another good sign.

The decline in the jobless rate came amid a lower labor force participation rate, suggesting that more employees who were sidelined during the pandemic are back to work.

Nick Bunker, economic research director at job placement site Indeed, was cited by CNBC as saying:

“This is quite a deflating report. This year has been one of false dawns for the labor market. Demand for workers is strong and millions of people want to return to work, but employment growth has yet to find its footing.”

The surge in wages, which rose by 0.6%, came amid an ongoing labor shortage, with companies using wage increases to attract workers.

Despite the slow employment growth, economists expect that school reopenings and the end of expanded federal unemployment benefits would contribute to an increase in hiring in the coming months, especially as companies are increasing wages.

The Nonfarm Payrolls report proves once again that the ADP National Employment Report, which usually comes two days ahead of the official jobs data, is failing at predicting the actual trends in employment data. On Wednesday, the ADP report beat expectations when it showed that US private payrolls had increased by 568,000 jobs in September.

How Does Jobs Report Impact USD?

Despite the disappointing jobs market data, the USD hasn’t been much affected given that the Fed is still on track to start reducing its bond-buying program in November this year, as previously suggested. For the Fed, the Labor Department’s jobs report is one of the most important pieces of data when it decides the monetary policy.

The central bank has maintained an accommodative monetary policy during the pandemic period, keeping the interest rates at a record low, and purchasing bonds worth $120 billion every month, thus stimulating the economic recovery. Usually, this kind of ultra-easy policy is putting pressure on the US dollar as investors move from money markets to stocks and other assets seeking higher yields.

However, this approach is leading to higher inflation, which has already exceeded the Fed’s limit of 2%. This is one of the reasons why the Fed is forced to start reducing the bond-buying program, but only after making sure that the economic growth objective has been achieved, and jobs data is a key measure. The central bank’s plan to start the tapering process as early as next month has supported the US dollar, with the USD Index surging in September to the highest in a year.

There are some concerns that the disappointing Nonfarm Payrolls data may force the Fed to delay tapering. Seema Shah, chief strategist at Principal Global Investors, said:

 “After looking like almost a done deal, today’s jobs number has thrown expectations for tapering into disarray. The Fed doesn’t seem to need much to convince it that tapering should begin imminently, but at just 194,000, jobs numbers are suggesting that the labor market is further from hitting the substantial progress goal than they expected.”

However, most analysts agree that the jobs report is unlikely to stop the central bank from reducing its bond-buying program, which can start next month. Mazen Issa, a senior FX strategist at TD Securities, told Reuters:

(It’s a) miss on the headline number for sure, but the underlying details are not as really nefarious as the top-line miss would suggest and so, ultimately, it’s still consistent with the Fed delivering taper next month.”

He added that the slight decline in the dollar was likely to be temporary. A similar interpretation was voiced by Bank of America strategists, who argue that, as a rule, in the week following jobs data, the USD tends to reverse most of the gain or loss associated with the NFP release.

On Friday, the USD Index, which tracks the greenback against six other currencies, declined slightly, although it is hovering above the support line of an uptrend that started in September.

Meanwhile, Friday data released by the Commodity Futures Trading Commission (CFTC) shows that USD net longs have surged to their highest in over two years in the week ended October 5. The value of net long USD positions was almost $23 billion versus $16.37 billion in the previous week. USD positioning has been net long for 12 weeks in a row after being net short for 16 straight months.

In the week ended October 8, the US dollar was stronger than the euro and the Japanese Yen, but it lost ground against the British pound, Canadian dollar, and the Swiss Franc.

Even though the USD Index rose to the highest in a year, USD/CAD has tumbled to the lowest since the end of July at 1.2470, as the loonie has been supported by surging oil prices, with WTI futures hitting the highest in seven years.

The US dollar has enough support to gradually continue its bold rally versus majors, although much depends on the Fed’s decision to start reducing its bond-buying program in November or delay tapering until December.



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