The NFP Surprise

We saw quite an anomaly (at least during this recession) on Friday, when the NFP report printed a big drop in job losses this November. As expected, the stellar results on the NFP report sparked risk appetite amongst investors, which led to a rise in equities. The big surprise, however, was that it also boosted sentiment towards the dollar, which overran all the other majors! The Fiber, Cable and Aussie pairs all dropped following the report. Could it be that the inverse relationship between equities and the dollar has finally broken?

Okay, this is what happened:

In a very surprising turn of events, the non-farm payrolls for the month of November only dropped by a mere 11,000. This outcome is a much better figure than the 119,000 consensus. The jobless rate for the same period also cooled down to 10.0% from 10.2% while job declines reached its slowest pace in about two years. Jobs cuts for the previous month were also revised down from 190,000 to 111,000.

During the past month, the US’s service industry added 58,000 jobs while its manufacturing sector lost 69,000. Still, total worked hours rose by 0.6% to 33.2 hours per week with an average earnings per hour also increasing by 0.1% to $18.74. These figures seem nice… well at least for the period covered.

Now, many people are wondering why the unemployment rate improved to 10.0% from 10.2% despite the additional 11,000 lost jobs. Well, the reason is that 100,000 people dropped out of the workforce. Perhaps some people decided to go back to school during the time that hiring was stagnant. In any case, currency traders believed the improvement was significant, and that the labor market would gradually improve over time.

On a month-on-month basis, sure, it might be good news but seeing things on a broader time frame implies otherwise. Overall, about 7.16 million workers have lost their jobs over the past 23 months. The broader measure of employment, underemployment, which takes into account those who were discouraged to seek for work and those forced to work part-time remains to be at a staggering 17.2%!

In order to regain these losses and keep up with the growing labor market (after all, kids won’t be in high school forever), the country must generate around 20,000,000 jobs within the next two years! Do you honestly think that’s possible?!? Talk about looking at the brighter side of things!

Federal Reserve Chairman Ben Bernanke doesn’t seem to think so. In his speech yesterday, he downplayed the upbeat outlook for the US labor market when he said that more convincing evidence was needed before declaring victory. Apparently, the surprisingly strong NFP report failed to rock Bernanke’s socks, causing traders to think that the better than expected figure was simply a one hit wonder.

Aside from that, he pointed out that the road to recovery is still littered with obstacles, namely weak inflation and tight credit. He emphasized that interest rates will remain low for an extended period of time… Hah! Haven’t we all heard that before? Although he did mention that the central bank is already considering exit strategies, his unfazed reaction to the employment report caused plenty of traders to lose their appetite for US dollars.

Okay, now going back to the correlation issue… You’ve heard me talk about this before. Whenever good US economic data is released, it leads to a rise in risk appetite, which causes investors to shy away from the dollar in search of higher yielding assets. Take note also that the dollar carries one of the lowest interest rate yields amongst the majors, which makes it a good funding currency for carry trades.

Risk appetite is a powerful thing and certain developments must take place to change the mind of currency traders. In my humble opinion, unless the US continues to print very strong economic data while the Fed shifts to a less accommodative monetary policy at the same time, the correlation break we saw last Friday will prove nothing more than a fluke.