The U.S. economy added 162k jobs last month, which was less than the market had anticipated but with payrolls excluding census jobs rising by 114k, the U.S. dollar surged against all of the major currencies. USD/JPY rose to a fresh yearly high while the EUR/USD extended its losses. The “real NFP number” was much stronger than most people had anticipated and the smaller than expected contribution from census jobs means there could be a larger contribution between April and May.
The numbers indicate that the labor market has turned a corner – back to back monthly job losses have come to an end and we expect continued job growth in coming months. Census hiring should swell in April and May with another 800k people expected to find government work. Even though these jobs will be temporary, they will provide a much needed boost for the economy and could even give some people the additional nudge that they need to spend a few hundred dollars on an iPad. For the next few months, we anticipate the improvement in labor market to stimulate spending and growth. Yesterday’s ISM manufacturing sector data indicated that factories will be a source of strength for the U.S. economy and today’s non-farm payrolls report suggests that consumers will also step up spending, paving the way for a strong a second quarter. After such a healthy non-farm payrolls number, we would be surprised if the Dow did not crack 11k when equity traders return on Monday.
Meanwhile there were both positive and negative aspects in the details of the NFP report and the positives certainly outweighed the negatives. Aside from strong job growth excluding census workers, February payrolls were revised up from -36k to -14k. The manufacturing sector continued to add jobs, the number of hours worked increased to 34.0, reflecting greater productivity while the unemployment rate remained unchanged at 9.7 percent. The only area of concern was in average hourly earnings which fell 0.1 percent in March, indicating that workers are making less but we do not expect this trend to last considering that productivity is on the rise.
NFPs Give Fed Reason to Raise Discount Rate on Monday
The stronger NFP number should also give the Fed the confidence to raise the discount rate on Monday when they hold their special meeting to review and determine action on the discount rate. Given that the central bank has already ended their asset purchase program, another discount rate hike would be the next logical step. The difference between the Fed funds rate and the discount rate is that the Fed funds rate is the rate that banks charge each other for loans while the discount rate is the rate that the Fed charges to commercial banks and other depositary institutions on loans. Raising the discount rate would help the Fed normalize monetary policy without affecting households. Prior to this easing cycle, the gap between the discount rate and the Fed funds rate was 100bp while the current spread is 50bp. This move is one that the Fed is bound to make eventually.
As for how the dollar could trade for the rest of the day, with the absence of U.S. equity traders, we did not see the risk rally that tends to occur near the U.S. equity market open. Based upon how the dollar traded after the NFP report in April 2007, there is good chance that the current trend in the dollar will last. Volatility should settle by the London close and the move that we see today should continue on Monday. The following chart shows how the EUR/USD performed on April 6, 2007 and how the move continued the following Monday. For a chart on how the EUR/USD traded on NFP day on April 6, 2007, read our NFP preview.