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The April NFP report looked pretty awful on the surface, so the Greenback slumped hard before doubling back and then climbing higher. Wait, what? Yep, you read that right. Well, looks like it’s time to take a closer look at the NFP report to try and see if we can sniff out some clues for the Greenback’s weird reaction.

USD Index 15-minute Forex Chart
USD Index 15-minute Forex Chart

Weaker employment growth but higher wages

  • Non-farm payrolls: 160K vs. 200K expected, 208K previous
  • Average hourly earnings m/m: 0.3% vs. 0.3% expected, 0.2% previous
  • Average hourly earnings y/y: 2.5% vs. 2.3% previous

Those of you who took the time to read up on my Forex Preview for the April NFP report may have been bracing yourselves for a potentially poor NFP report since I concluded then that it’s “likely that April’s net increase in non-farm employment is gonna be lower when compared to March, so the consensus reading seems about right, but chances are also skewed more towards a possible downside surprise.”

And boy did we get a downside surprise since non-farm employment in April only saw a net increase of 160K, which is the lowest in seven months and way lower than the expected 200K increase. Not only that, the previous reading was revised lower to 208K from 215K as well.

On a more upbeat note, wages grew at 0.3% month-on-month, which is faster than the previous month’s downwardly revised earnings growth of 0.2% (0.3% originally). This translates to a year-on-year wage growth of 2.5% in April, which is faster than March’s 2.3% increase.

Manufacturing gained jobs

After two consecutive months of losses, with March’s net loss of 29K jobs being the biggest ever since 2009, manufacturing finally saw a modest net increase of 4K jobs. However, most manufacturing industries continued to lose job, albeit at a slower pace, as you can see in the tables below.

NFP Report: Durable Goods

NFP Report: Nondurable Goods

Weaker jobs growth in the service sector, but…

The service sector continued to generate jobs, adding 174k jobs in April. This is fewer than the 184K jobs added in March. Incidentally, the number of service sector jobs added in March was revised lower from 199K, and this downgrade is the main reason why March’s NFP reading was also revised lower.

Getting back on topic, the biggest disappointments came from the retail industry, which had a net decrease of 3.1K (+39K previous), and the the leisure and hospitality industry, which only saw a net increase of 2K jobs (24K previous). There is a bright spot, however, since the higher-paying professional and business services industry generated 65K jobs.

NFP Report: Service Sector

Lower participation rate

  • Jobless rate: held steady at 5.0% vs. tick lower to 4.9% expected
  • Labor force participation rate: dropped from 63.0% to 62.8%

The jobless rate held steady at 5.0% in April, which is a disappointment since it failed to tick lower, but at least it held steady, so it’s still good, right? Well, digging deeper into the details of the report shows that it wasn’t all that good since the jobless rate held steady even though a whopping 562K workers decided to call it quits and get out of the labor force, causing the labor force participation rate to drop to 62.8% and breaking four consecutive months of improving readings in the process.

What market analysts say…

The April NFP report was a bit mixed, but pretty bad overall. It was so horrible that most economists and banking institutions downgraded their rate hike expectations, according to a survey conducted by Reuters.

Goldman Sachs, for example, told its clients that “In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase” in June, predicting that the Fed will be hiking rates in September instead.

Some even began to predict only one rate hike within the year instead of two. For instance, Barclays New York Chief Economist Michael Gapen said on Friday that:

“We now only expect one rate hike in 2016, in September, as we believe it will take longer for policymakers to accumulate sufficient evidence that economic and labor market activity is rebounding after a soft start to the year.”

That’s good to know, but that still leaves one question that has yet to be resolved: if the NFP report was so bad, then why did the Greenback recover quickly (and then some)?

Some market analysts attributed the Greenback’s recovery to New York Fed President and FOMC voting member William Dudley’s comment in an interview with the New York Times that the poor readings didn’t materially affect his own economic outlook and that it’s still a “reasonable expectation” that the Fed would be hiking rates at least two times this year.

That sounds very reasonable, but the only problem is that Greenback bulls began buying up the Greenback across the board 5-10 minutes after the NFP report was released and before Dudley could impart his wisdom to the market. It is highly likely that Dudley’s upbeat words fueled post-NFP demand for the Greenback, though.

Other market analysts focused on the higher earnings instead, arguing that the U.S. economy is currently near full employment, so wages would now be the focus, while citing Fed Head Janet Yellen’s December comment that “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month.” Numbers above that 100K floor mean that those who are unemployed or who left the labor force were getting “absorbed” into the U.S. economy, so everything’s cool as long as net gains in jobs don’t go below 100K.

In simpler terms, the lower-than-expected increase in employment isn’t that much of a speed bump, so the Fed is still on track for at least two rate hikes in 2016.

I’m personally leaning more towards this explanation since I also told y’all to “make sure to keep a close eye on wage growth since a weaker-than-expected reading may convince forex traders, especially the interest rate junkies, to send the Greenback lower, even if the other readings are within or beat expectations.” In this case, wages didn’t disappoint and forex traders probably used that as an excuse to pounce on the Greenback.

Final Thoughts

At this point, I would like to refer to what Pip Diddy refers to as the “Tuesday Turning Point” in his latest Top Forex Market Movers, which is when sentiment on the Greenback very noticeably switched to bullish during Tuesday’s morning London session, even though there weren’t any direct catalysts for the Greenback.

USD/JPY 1-hour Forex Chart
USD/JPY 1-hour Forex Chart

Most market analysts refrain from addressing what was driving the Greenback higher, but Pip Diddy attributed the Greenback’s strength to the return of risk aversion, which generated safe-haven demand, but since Japanese Prime Minister Shinzo Abe was warning that excessive forex moves were undesirable just a few hours before, forex traders opted to load up on the Greenback instead of the yen.

Basically, the Greenback was the safe-haven currency of choice for the week. To that I would add the upbeat remarks from Fed officials, which likely kept rate hike expectations alive and sustained demand for the Greenback during the few bouts of risk appetite within the week, which incidentally included Friday.

Well, whatever the case may truly be, it’s certainly interesting that the Greenback started to gain strength across the board on Tuesday. Perhaps this underlying strength also allowed the Greenback to just shrug off the poor NFP report? It sure makes you think how the Greenback will fare next week, huh?