Hello, forex friends! If you need a quick rundown of the important details of the February NFP report, or if you’re wondering why the Greenback tanked, then this quick review may be just what you need.
Upside “surprise” for employment
- February non-farm payrolls: 235K vs. 185K expected
- January non-farm payrolls: upgraded from 227K to 238K (+11K)
- December non-farm payrolls: downgraded from 157K to 155K (-2K)
I pointed out in my Forex Preview for the February NFP report that probability appears skewed more towards an upside surprise, given that economists historically tend to undershoot their forecasts, resulting in frequent upside surprises.
Well, that historical tendency held true, since non-farm payrolls increased by 235K in February, which is an upside “surprise” from the +185K consensus. Even better, January’s solid +227K reading was upgraded to an even more solid +238K.
But on a slightly more downbeat note, December’s employment charge was downgraded from +157K to +155K. Still, non-farm payrolls from the previous months increased by 9K more than originally estimated, which is a good thing.
As for the usual breakdown, job growth in the service sector eased a bit. Markit’s services PMI report was, therefore, spot-on about slower jobs growth from the service sector. And one of the major causes for the slowdown is that retail trade jobs took a substantial hit while jobs growth from the financial activities industry slowed down.
Moving on, both Markit and ISM reported that job growth in the manufacturing sector slowed down in February. However, the opposite held true since job growth in both the durable goods and non-durable goods manufacturing sectors actually picked up the pace.
And here’s the employment situation for the other major sectors. The most noteworthy is the significant 58K increase in construction jobs, which is the largest increase since March 2007.
Wage growth was a miss (again)
- February average hourly earnings m/m: 0.2% vs. 0.3% expected
- February average hourly earnings y/y: 2.8% as expected
- January average hourly earnings m/m: upgraded from 0.1% to 0.2%
- January average hourly earnings y/y: upgraded from 2.5% to 2.6%
The general consensus was that wage growth will print a 0.3% month-on-month increased in February. However, the actual reading for average hourly earning only showed a 0.2% increase (+$0.06) to $26.09.
But on a more upbeat note, January’s anemic +0.1% wage growth was upgraded to +0.2%. Also, average hourly earnings grew at a faster pace year-on-year (+2.8% vs. +2.6% previous).
Looking at the details of the NFP report, the mining, non-durable goods manufacturing, and construction sectors, as well as the utility industry, all printed negative wage growth and were the major drags.
- Mining only accounts for 0.47% of total employment but wages fell by 0.79% (-$0.26) to $32.63.
- Non-durable goods manufacturing accounts for 3.19% of total employment and wages fell by 0.08% (-$0.02) to $24.20.
- Construction accounts for 4.72% of total employment and wages fell by 0.04% (-$0.01) to $28.48.
- Utilities only accounts for 0.38% of total employment but wages fell hard by 1.28% (-$0.50) to $38.50.
Jobless rate ticked lower
- Jobless rate: downtick from 4.8% to 4.7% as expected
- Labor force participation rate: climbed from 62.9% to 63.0%
As expected, the jobless rate ticked lower from 4.8% to 4.7%, with the number of jobless people falling from 7,635K to 7,528K. Even better, the jobless rate fell even though the labor force participation rate ticked higher from 62.9% to an 11-month high of 63.0%.
This means that the U.S. economy was able to absorb the influx of new and returning workers, which is great. Also, the uptick in the labor force participation rate marks the fourth consecutive increase and shows that Americans are eager to get back into the labor force.
Despite the miss in wage growth, February’s NFP report was actually pretty solid overall. In fact, it was so solid that it practically cemented expectations for a rate hike next week, with the CME Group’s Fedwatch Tool showing odds for a March rate hike at 93%.
Not only that, the odds for a second rate hike by June also rose from 45.4% to 55.4%. By the way, if you wanna know how to read the CME Group’s FedWatch Tool, or have no idea what’s it all about, you can check out my quick primer about it here.
Okay, if the NFP report was that awesome, then why did the Greenback tank instead of moving higher?
Well, market analysts are pointing mainly to profit-taking after a relatively strong week for the Greenback. And market players decided to take profits off the table because some market players were disappointed with the rate of wage growth while others were expecting a higher payroll number, especially after the ADP report printed a 298K increase in non-farm payrolls back on Wednesday. So basically, a “buy the rumor, sell the news” scenario played out.
And disappointment over wage growth sounds about right, since the Greenback usually has a knee-jerk reaction to the reading for non-farm payrolls, spiking higher when non-farm payrolls exceed expectations.
However, that knee-jerk reaction only lasted for a few minutes and was very limited, which implies that market players already had their sights on wage growth right from the get-go.
The NFP report wasn’t enough to give the Greenback an extra bullish boost. However, it was enough to improve rate hike expectations. So, given the recent hawkish rhetoric from Fed officials and taking the other U.S. economic indicators into account, do you think the Fed will hike in the upcoming FOMC meeting and monetary policy statement? Share your thoughts by voting in the poll below!