Immediately after the NFP report crossed the wires, the U.S. dollar, as measured by the DXY index, extended its decline, as Treasury yields deepened their session slump and expectations for the Fed’s terminal rate drifted lower. The reaction is a bit counterintuitive as employment growth remained extremely strong last month, but it is possible that the market took solace in the fact that wages did not rise as much as anticipated. In any case, average hourly earnings have been very volatile and subject to frequent revisions, so this move could fade as results are fully digested and interpreted. The situation with SVB Financial may also explain part of today’s reaction: traders are very apprehensive about the possibility of a banking crisis in response to the Fed’s extremely hawkish stance to the point that they will take any sliver of good news and run on it.
FED FUNDS FUTURES, TREASURY YIELDS AND US DOLLAR CHART
U.S. employers continued to add to their ranks at a robust pace last month, but hiring momentum decelerated compared to the start of the year, a welcome development for Fed officials who have launched one of the most aggressive tightening campaigns in decades to slow the economy in their quest to return inflation to the 2% target. According to the Bureau of Labor Statistics (BLS), payrolls rose by 311,000 in February, versus 205,000 expected, following a downwardly revised increase of 504,000 in January. Meanwhile, the unemployment rate climbed to 3.6%, two-tenths of a percent above consensus estimates, with the move likely driven by the increase in the labor force participation, which inched up to 62.5% from 62.4%.
US LABOR MARKET DATA CHARTS
Source: U.S. Department of Labor
Elsewhere in the BLS’s survey, average hourly earnings, an important inflation indicator for the central bank, climbed 0.2% on a monthly basis, pushing the annual rate to 4.6% from 4.4% previously. The median forecast in a Reuters poll of economists called for earnings to rise 0.3% month-over-month and 4.7% year-on-year. While solid job growth can be concerning at a time of labor market tightness, the fact that employment costs are not rising as fast as feared can be seen as a positive signal for the Fed’s efforts to restore price stability. One month’s report is not enough to make broad conclusions, but it is encouraging nonetheless. With the NFP data in the rearview mirror, attention will now turn to the U.S. February inflation report, which will be released next Tuesday. Headline CPI is seen cooling to 6.0% y-o-y from 6.4% in January, while the core gauge is forecast to clock in at 5.5% from 5.6% previously. In terms of possible scenarios, hotter-than-anticipated data could revive expectations for faster tightening, putting back in play a half-a-point interest rate rise rather than a 25 basis point hike. On the flip side, softer-than-forecast results could help quiet the hawkish narrative, solidifying calls for less aggressive tightening over the forecast horizon.