Over the last few months, North American markets, and in particular the US Dollar, have been enjoying an amazing run of strength. US data has been either good or mildly good, the Federal Reserve continued to taper Quantitative Easing in to oblivion, China exhibited signs of slowing down, and central banks from the rest of the world are either leaning toward dovishness or introducing policies that outright exclaim it. Then suddenly, last month’s Non-Farm Payroll report disappointed the masses by only printing at 142k, well below the cacophony of 200k expectations. Market participants became tense, and weren’t as sure of themselves as they were previously, seemingly waiting for another sign that they were right all along.
Today, that signal was illuminated.
Dollar Bulls
The US labor market is back on the right track after the Bureau of Labor Statistics counted 248k new jobs in the month of September, well above the expected 215k via consensus and in addition, lowered the Unemployment Rate down to 5.9% from 6.1%. Almost in unison, the USD bulls came out of their hiding places and bid up the venerable currency against all her rivals with USD/JPY eyeing 110, EUR/USD seeking 1.25 and GBP/USD taking out 1.60.
As for that previously dismal 142k result from last month? Yeah, that was revised up to 180k. Heck, even July’s result was revised upward to 243k from 212k indicating that there were 69,000 more jobs in July and August than previously reported. What were we worried about?
Unfortunately, with any run of good news, there just might be some bad. The one measure that failed to ignite excitement was the Average Hourly Earnings, which remained stagnant from last month at 0.0% on expectations of 0.2%. The previous result was revised upward to 0.3% from 0.2%, accounting for at least 0.1% of the expectation, but the Fed has been hinting that the QUALITY of jobs gained is almost as important as the QUANTITY and today’s Earnings figure doesn’t help that cause.
What About Rates?
As with any burst of good data that comes down the pipe in the US, the attention now turns toward the Federal Reserve and their decisions on future interest-rate policy. Fed Chair Janet Yellen has mentioned in the past that the first interest rate hike could come as soon as six months after QE was done, a sound bite she aggressively backed away from, but relevant nonetheless. Even the Fed’s “Dot Matrix” shows that many members believe that interest rates will be increased in 2015 with the average being around 1.25%-1.50% by the end of the year.
If we assume that the Fed increases interest rates at a pace of 0.25% per meeting with an initial setting of 0.25% at the March 2015 meeting (from 0%-0.25% currently), the rate would reach 1.75% by the end of the year. However, considering the cautious nature the Fed would likely go about increasing rates, it wouldn’t be out of the realm of possibility to believe they may pause and survey their impact for one or even two of those meetings, putting us squarely in the 1.25%-1.50% range. Coincidence? I think not!
While the labor market is squarely in the spotlight today, the US economy on the whole is improving despite the Fed taking away their life support, and it may actually be time for them to cut the cord. After spending the bulk of the last six years in ICU, this patient is about to get up and walk out on his own two feet.