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What’s up, forex friends?

The January NFP report was released yesterday, and the Greenback tossed and turned before ultimately tanking.

What’s up with that? Well, time to find out!

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

Jobs growth in January was yuuuge, but…

  • January non-farm payrolls: 227K vs. 175K expected
  • December non-farm payrolls: upgraded from 156K to 157K (+1K)
  • November non-farm payrolls: downgraded from 204K to 164K (-40K)
  • October non-farm payrolls: further downgraded from 135K to 124K (-11K)

I concluded in my Forex Preview for the January NFP report that the available leading indicators were mixed, but that the consensus reading of a moderately faster rate of job creation looks about right. However, I also noted that “probability appears skewed towards a downside surprise since historical trends show that economists tend to overshoot their estimates.”

Well, the leading indicators that pointed to a rapid acceleration in job growth were apparently right. Furthermore, January 2017 happened to be one of those few times when economists undershoot their estimates, resulting in an upside surprise.

Anyhow, non-farm employment in January saw a net increase of 227K, which is significantly more than the +175K consensus and the previous month’s upwardly revised +157K (+156K originally).

January NFP: Expected vs. Actual

But on a more downbeat note, the reading for November was drastically downgraded from 204K to 164K while the reading for October was further reduced from 135K to 124K.

And those downward revisions, together with the slight upward revision for the December period, mean that the U.S. economy actually generated 50K fewer jobs than originally estimated.

As for the breakdown, job growth in the service picked up the pace, with most sub-sectors printing increases. And the higher increase in payrolls from the service sector is the main reason why non-farm employment in January jumped.

January NFP: Services

Moving on, the manufacturing sector printed another net increase in jobs. However, job creation in January slowed compared to December.

But on a more positive note, job gains came from the higher-paying durable goods manufacturing sector.

January NFP: Durable Goods Manufacturing

January NFP: Non-Durable Goods Manufacturing

And here’s the employment situation for the other major sectors. Construction originally printed a 3K fall in December, but that was revised higher to print a 2K increase instead.

Also, note that the large increase in construction jobs helped boost employment numbers in January.

January NFP: Others

Wage growth was a miss. Sad!

  • January average hourly earnings m/m: 0.1% vs. 0.3% expected
  • January average hourly earnings y/y: 2.5% vs. 2.8% expected
  • December average hourly earnings m/m: downgraded from 0.4% to 0.2%
  • December average hourly earnings y/y: downgraded from 2.9% to 2.8%

Economists and market players were expecting wage growth to ease a bit after December’s impressive 0.4% increase.

However, wage growth decelerated at a significantly more rapid pace than expected, since average hourly earnings only increased by 0.1% month-on-month (+$0.03) to $26.00. To make matters worse, December’s stellar 0.4% increase was downgraded to a not-so-stellar 0.2% increase.

Year-on-year, this translates to a 2.5% increase in January. December’s annual reading, meanwhile, was downgraded from 2.9%, a high not seen since 2009, to 2.8%.

Looking at the details of the NFP report, almost all industries actually printed an increase in wages in January. However, the 1.04% drop in earnings (-$0.34) to $32.65 from the financial activities industry was a major drag, since it’s one of the highest-paying industries and it also accounts for 5.77% of total employment.

The contraction in earnings from the financial activities industry isn’t the only reason for the slowdown in jobs growth during the January period, though, since a vast majority of industries also printed a slower rate of earnings increase in January.

Jobless rate deteriorated (again), but…

  • Jobless rate: ticked higher to 4.8% to steady at 4.7% expected
  • Labor force participation rate: climbed from 62.7% to 62.9%

The jobless rate was expected to hold steady at 4.7%. Instead, it climbed higher to 4.8%, a three-month high. Also, this marks the second consecutive month of deterioration for the jobless rate.

But on a more upbeat note, the participation rate also climbed from 62.7% to a four-month high of 62.9%. This marks the third consecutive month of improvements for the participation rate, and also means that more Americans are being encouraged to join or rejoin the labor force.

Still, the number of unemployed people increased from 7,529K to 7,635K, so the U.S. economy was apparently unable to absorb the influx of people who joined or rejoined the labor force.

Final Thoughts

Like the December NFP report, January’s NFP report was also mixed, since non-farm payrolls in January saw a substantial increase but the revisions to the previous months mean that the U.S. economy generated significantly fewer jobs than originally estimated.

Wage growth, meanwhile, was a miss. But even more disappointing was December’s impressive numbers getting downgraded. As for the jobless rate, it increased again, but that’s not so bad since that was due to the participation rate also increased.

Overall, however, the January NFP report was a disappointment, especially the poor wage growth.

While growth wasn’t really that horrible (it still printed an increase after all), the market was expecting a much faster rate of increase. Also, the market wasn’t expecting that December’s stellar readings would also get revised lower.

Furthermore, the downward revisions for the past readings for non-farm payrolls remove some shine from January’s impressive numbers.

As a result, rate hike expectations deteriorated. Expectations for a March rate hike, for example, plunged from 17.7% to just 8.9%, according to the CME Group’s FedWatch Tool.

March FOMC Expectations (As of February 3. 2017)
March FOMC Expectations (As of February 3. 2017)

A June rate hike, meanwhile, slid from 69% to just 63.5%. By the way, if you wanna know how to read the CME Group’s FedWatch Tool.

June FOMC Expectations (As of February 3. 2017)
June FOMC Expectations (As of February 3. 2017)

As such, the Greenback reacted by initially jumping higher on the better-than-expected reading for non-farm payrolls. The Greenback then got dumped once market players took a good, hard look at the NFP report and concluded that it was bad for rate hike odds. Odds for a March rate hike, in particular, got torpedoed because of the NFP report.

However, San Francisco Fed President John Williams was interviewed by Bloomberg later, and he said that “From a risk management point of view, there’s an argument to move sooner, rather than wait.”

Do note that Williams is not a voting FOMC member this year, but his words apparently had an effect on the market, since the Greenback stabilized and even recovered a bit.