Non-Farm Payrolls: A Smash Hit!

U.S. Labor Report Beats Forecast

The U.S. employment report revealed that companies added a net total of 236,000 jobs last month, which is almost 1.5 times greater than the consensus forecast of 162,000.

Consequently, the unemployment rate dropped to its lowest level since December 2008 as it fell from 7.9% to 7.7%. Meanwhile, average hourly earnings grew 0.2%, just as expected. All in all, great news for the U.S.!

Effect on the Markets

The unexpected surge in jobs growth had a broad-based ripple effect on the markets, sending not just the dollar higher, but equities and treasury yields as well. It delivered rare optimistic news for the U.S., showing economic strength despite looming payroll tax hikes and government budget cuts.

The S&P 500, which is considered by many as a bellwether of the U.S. economy, jumped to 1,551.18 to close the day with a gain of around 0.50%. Likewise, treasury yields inched up from 2% to 2.04%.

However, you would’ve been hard-pressed to find a bigger gainer than the Greenback, which absolutely trounced its counterparts. The U.S. dollar index climbed to as high as 83.40 at one point, before settling at 83.18, up from 82.55 at the start of the day.

Early End to the Fed’s Liquidity Party?

The strengthening labor market has led to renewed speculation that the Fed could start tightening monetary policy as early as December this year. Some analysts are even saying that the Fed could end it completely in 2014. But after digging deeper into the encouraging headlines, I found out that there is still underlying weakness.

Sure, in itself, the growth in the labor market for February was healthy, but compared to previous years, it is still unimpressive. More and more people are quitting the workforce, which is artificially reducing the unemployment rate.

Job growth also came from unlikely, possibly unsustainable sources like the motion picture sector, which created around 20,000 jobs to the total.

What’s most significant perhaps is that we’ve seen the job market post stellar gains before, only for it to return to slow growth after a few months. Don’t believe me? Check out the employment figures from January to July of last year. Gains notably picked up during Q1 but suddenly shrunk in Q2.

Non-Farm Payrolls January 2012 to June 2012

I think it’s going to take more for the Fed to even seriously consider tightening monetary policy. The current unemployment rate remains above the level the Fed’s 6.5% minimum target. Not only that, but the Fed will want to see a sustained growth in jobs and perhaps even broader signs of improvement in the U.S. economy.

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