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Hello, forex friends! The March NFP report was released yesterday. And the Greenback reacted by dropping hard and then recovering quickly. If you wanna know what that was all about, then you better read up on the employment situation in March.

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

Downside “surprise” for payrolls

  • March non-farm payrolls: 98K vs. 175K expected
  • February non-farm payrolls: downgraded from 235K to 219K (-16K)
  • January non-farm payrolls: downgraded from 238K to 216K (-22K)

I summarized in my Forex Preview for the March NFP report that the available leading indicators were mixed, but that “probability seems skewed more towards a downside surprise, given that economists have a historical tendency to overshoot their forecasts, resulting in far more downside surprises.”

As it turns out, the latest NFP report shows that economists overshot their forecasts again, since we got another downside “surprise”. Specifically, the U.S. economy only generated 98K jobs. This is obviously a very significant miss from the expected net increase of 175K.

March NFP: Expected vs. Actual

Worse, the reading for non-farm payrolls in February was downgraded from 235K to 219K. Not only that, the reading for January was downgraded from 238K to 216K as well. That’s means that the U.S. economy generated 38K less jobs than originally estimated, which is rather disappointing.

Moving on to the usual breakdown, the drastic slowdown in jobs growth in March was due to a sudden slowdown of jobs growth from the service sector. And jobs growth in the service sector weakened mainly because of another round of job losses in the retail trade industry and the arts, entertainment, and recreation industry. Job creation in the healthcare and social services industry also slowed while educational services printed a net loss after strong jobs growth previously.

March NFP: Services

The manufacturing industry is more mixed, since durable goods manufacturing picked up the pace of jobs growth while non-durable goods manufacturing printed only a small gain after a strong showing previously. As a whole, however, jobs growth in the manufacturing sector slowed down (+11.6K vs. +26.0K previous).

March NFP: Durable Goods Manufacturing

March NFP: Non-Durable Goods Manufacturing

Job creation in the construction sector also slowed down significantly after being one of the major contributors last month.

March NFP: Others

Wage growth meet expectations

  • Average hourly earnings m/m: 0.2% as expected, same as previous
  • Average hourly earnings y/y: 2.7% vs. 2.8% previous

Jobs growth was a swing and a miss. Fortunately, wage growth was a hit, albeit not a home run, since average hourly earnings increased by 0.2% ($0.05) to $26.14, which is in-line with expectations.

Almost all industries printed an increase in wages. However, the biggest contributor to the increase in average hourly earnings was the higher-paying business and professional services industry, since it printed a 0.92% increase ($0.29%) in earnings to $31.65. The aforementioned industry accounts for about 16.7% of total private non-farm employment.

The biggest drag, meanwhile, came from the educational services industry, which printed a 0.19% fall (-$0.05) in earnings to $26.06.

Jobless rate drops

  • Jobless rate: 4.5% vs. steady at 4.7% expected
  • Labor force participation rate: steady at 63.0%

The jobless rate unexpectedly dropped from 4.7% to 4.5%. This is the best reading since May 2007, which is great.

Even better, the labor force grew from 160,056K to 160,201K, but the participation rate held steady at 63.0% while the number of unemployed people fell from 7,528K to 7,202K.

By the way, if you’re baffled how the number of unemployed people fell by 326K when the net number of jobs generated was only 98K, then just know that the NFP report actually uses two surveys.

The first survey is the establishment survey conducted by the U.S. Bureau of Labor Statistics. It’s basically a survey of non-farm businesses and government agencies. And that’s were we get the data for non-farm payrolls and average hourly earnings.

The second survey, meanwhile, is a household survey conducted by U.S. Census Bureau. As it says on the label, the survey is conducted on the household level and is more comprehensive than the establishment survey, since it includes farm jobs, household workers, unpaid family workers, and self-employed workers in unincorporated businesses. And it is from the household survey where we get the data for the labor force, the jobless rate, and the participation rate.

And given the different sources for the data, different methodologies, as well as the difference in scope, it’s only natural to see disparity in the data from time-to-time.

Final Thoughts

Jobs growth was very poor in March. And this is made worse by the fact that the reading was below the 100K floor. As such, odds for a June rate hike dropped from 70.9% to 66.1%, according to the CME Group’s FedWatch Tool. Meanwhile, the Greenback reacted by weakening across the board.

June Rate Hike Odds (Post-NFP)
June Rate Hike Odds (Post-NFP)

However, wage growth came in line with expectations and the jobless rate even improved. Also, some market analysts suggested that the slowdown in jobs growth may be temporary, citing the snowstorm in the north-eastern U.S., which may be the culprit for the sudden slowdown in construction jobs growth. As a result, the Greenback rebounded after the initial drop.

The Greenback’s recovery later became a rally after New York Fed President William Dudley said that even if the Fed does implement a change to its balance sheet policy, it would provide “little pause” to the Fed’s path to tightening.

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

According to market analysts, Dudley’s comment attracted rate hike junkies who are expecting two more hikes this year. And that indeed appears to be the case, since odds for two rate hikes by December rose from 56.6% to 58.9% after Dudley spoke.

December Rate Hike Odds (Post-Dudley)
December Rate Hike Odds (Post-Dudley)

Dudley’s speech also helped odds for a June rate hike to recover back to 70.9% after dropping in the wake of the disappointing NFP report.

June Rate Hike Odds (Post-Dudley)
June Rate Hike Odds (Post-Dudley)

How about you? Do think the Fed is still on track for 2 more rate hikes this year? Share your thoughts by answering the poll below!