Morning Brief – Never a dull non-farm

Charles Porter
Tue 7 Feb 2023

Never a dull non-farm

Non-farm payrolls data almost always provides the observers an opportunity to witness and potentially trade with some volatility in the markets. More often than not the salience of the event and the mixed expectations moving into it leads to more price fallout from the noise generated from the event instead of the signal attributable to it. There are exceptions to that rule and Friday’s non-farm payroll release was one such exception. The material outperformance that we saw within both the absolute monthly payroll numbers and the more approachable unemployment rate led to a decisive and lasting strengthening of the US Dollar. 

Given how transparent the Federal Reserve was during their decision only last Wednesday, there was the distinct possibility that the high-salience numbers would fail to provide their usual seismic impact. Jay Powell’s Federal Reserve made their forward guidance on policy so plain that in the absence of a major shock from Friday’s numbers, interest rate expectations should remain well anchored. The readings showed that the US economy created 517,000 jobs in the month of January, bringing the unemployment rate down to 3.4%. Those numbers defied expectations for 185,000 jobs added and a 3.5% unemployment rate.

Despite the stability of rate expectations moving into the data release, the divergence from expectations was sufficient to dislodge incumbent pricing in the fixed income market. Accordingly, markets priced in further Federal Reserve interest rate adjustments with peak-Fed funds rates now priced north of 5%. That brought significant demand into the US Dollar driving the EURUSD exchange rate down on Friday to almost 1.08 and GBPUSD towards 1.20.

The strong Dollar-environment created by the non-farm payrolls release was supplemented by further soft data later on during Friday’s session. Purchasing manager’s indices for January from S&P global outperformed consensus forecasts and previous readings showing a faster than expected recovery in economic conditions within the US. The ISM index also significantly outperformed drawing significant flows to the Dollar whilst analysts’ perceptions of US economic fundamentals improved. This is good news for the Dollar, but bad news for other currencies whose valuations were beginning to enjoy a release from the prospect of the Fed curtailing its rate adjustment cycle.

Discussion and Analysis by Charles Porter

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