May 2013 NFP: Not Great, But It Will Do!

Prior to the release of the May NFP report, there were fears that the actual figure would disappoint. Why?

For one, the employment gauge of the ISM reports for May posted very little change. For both the manufacturing and non-manufacturing sectors, the employment readings came in just a hairsbreadth above the break-even level of 50.0.

Meanwhile, the ADP employment report, which is considered to be the leading indicator of the NFP, missed expectations terribly! The reading was at 135,000 versus the 171,000 forecast. This translates to its second worst figure in 8 months. For the most part, the weakness was a reflection of increases in taxes and cuts in government spending.

Given these, worrywarts had very good reason to be concerned. Consequently, we saw the dollar give up ground to its counterparts ahead of the NFP release. Investors felt that if the jobs figure showed significant weakness, it may just be enough for the Fed to put off its plans of tapering QE.

But lo and behold! The actual NFP reading came in better than expected!

The headline figure showed a 175,000 increase in jobs for the month, just above the 167,000 consensus. It wasn’t all good news though. April’s reading was revised lower from 165,000 to 149,000. Also, the unemployment rate trickled higher to 7.6% from 7.5% and basically takes the Fed further away from its 6.5% target.

I think I know what you’re thinking — the results aren’t spectacular. However, it seems like they were enough to calm the markets and put an end to the dollar’s slide… at least for now. Some analysts argue that job growth for May is enough to keep the Fed on track to taper its asset purchases later this year.

As for the rise in the unemployment rate, it’s not really something to be worried about. A closer look at the report shows that the increase from 7.5% to 7.6% only reflects the increase in participation in the labor market. The number of people who joined the work force or those who actively started looking for jobs hit 63.4% in May. This is the first time we’ve seen it this high since October 2012!

USDX Chart

As you can see, the employment reports caused quite a stir in the markets and pushed the dollar higher. However, as bullish as it was for the American currency, it wasn’t enough to completely undo the dollar’s losses from the days leading to the NFP release.

It still has a lot of room to rise before it can return to the previous week’s levels, which suggests that the dollar hasn’t completely shaken off the markets concerns about QE.

According to Julia Coronado of BNP Paribas, “The report is inconclusive in its implications for monetary policy.” Other analysts think that the Fed will need to see gains above 180,000 or even 200,000 before it feels confident enough to scale back its asset purchases.

If you ask me, at this point in time, only one thing feels certain – that the job market is holding up, but it still faces considerable headwinds. With the government shedding jobs to cut costs (it cut 45,000 jobs over the past 3 months alone), the burden of job creation lies on the private sector – and that’s no light load!

Right now, we can’t really rule out the tapering of QE, as the job market has been showing gains, but the rate at which it’s improving isn’t exactly inspiring either. Call me conservative, but it seems to me that we’ll have to keep watching U.S. reports before we can pass judgment on the economy and the likelihood of an early QE exit from the Fed.