So much for speculation of a June or September Fed Funds rate hike. After our exhaustive commentary on the FOMC's latest statement on 19 March 2015, we concluded that a "September rate "liftoff" was extremely unlikely" despite the rather hawkish banter from various Fed officials over the course of the ensuing weeks.
The economic numbers and money markets are simply screaming that the risks of tightening monetary policy prematurely has gotten very real and forefront. Just so happened on Easter Friday, the monthly non-farm payrolls (NFP) report for March came out to be their worst since December 2013.
We aren't biting our lips on this one, the miss was huge. Huge. At almost 50% below consensus, it is hard to overstate the severity of the disappointment March's jobs figures brought.
More importantly, the latest NFP report bolsters our stance on volatility. Not only has volatility seen a resurgence in the financial markets, it has also reared its ugly head in economics - namely by the unpredictable consistency of actual data releases with respect to analysts' estimates. Recall that the US economy is currently neither in inflation or deflation (February CPI change of 0%) after promptly slipping into the latter in January. On top of that, readers will recall how the final 4Q14 GDP was revised lower to 2.2% by the BEA, missing estimates of 2.4%.
48% Less Jobs Added Vs. Expectations
The entire data set was downright ugly. It might seem a little ludicrous that just a month ago, almost everyone was cheering the strength of the US labor market. Having handily smashed expectations for 5 months straight (since October 2014), the jobs market was the main centrifuge that had kept on spinning. That is until March came, and downed all hopes of a true renaissance.
The full breakdown:
- Only 126,000 jobs were added, missing expectations of 245,000 and a far cry from February's 264,000 print;
- January's and February's figures were revised lower from 239,000 to 201,000, and 295,000 to 264,000, respectively;
- Total downward revisions so far in 2015 at 69,000;
- March's NFP was the worst since December 2013;
- Private non-farm payrolls came in at 129,000, missing expectations of 237,000 and down from February's 264,000;
- The U3 unemployment rate held at 5.5%, inline with expectations. The U6 unemployment rate decreased by 0.1% to 10.9% from February's 11%;
- Average hours worked per week declined by 0.1 hour to 34.5 hours from 34.6 hours in February, missing expectations by the same magnitude;
- The manufacturing workweek decreased by 0.1 hour to 40.9 hours;
- The manufacturing workweek decreased by 0.1 hour to 40.9 hours;
- The labor force participation rate fell by 0.1% to 62.7%, from 62.8% in February; the lowest since 1978;
- The only positive surprise was in average hourly earnings with increased by 0.3% from February's 0.2%; note however that with inflation at 0% vs. the -0.1% expected a week ago, average hourly earnings actually came in as expected after adjustment.
Full report from the Bureau of Labor Statistics:
Total nonfarm payroll employment increased in March (+126,000). Over the prior 12 months, employment growth had averaged 269,000 per month. In March, employment continued to trend up in professional and business services, health care, and retail trade, while employment in mining declined. (See table B-1.)
Employment in professional and business services trended up in March (+40,000). Job growth in the first quarter of 2015 averaged 34,000 per month in this industry, below the average monthly gain of 59,000 in 2014. Within professional and business services, employment continued to trend up in architectural and engineering services (+4,000), computer systems design and related services (+4,000), and management and technical consulting services (+4,000).
Health care continued to add jobs in March (+22,000). Over the year, health care has added 363,000 jobs. In March, job gains occurred in ambulatory health care services (+19,000) and hospitals (+8,000), while nursing care facilities lost jobs (-6,000).
In March, employment in retail trade continued to trend up (+26,000), in line with its prior 12-month average gain. Within retail trade, general merchandise stores added 11,000 jobs in March.
Employment in mining declined by 11,000 in March. The industry has lost 30,000 jobs thus far in 2015, after adding 41,000 jobs in 2014. The employment declines in the first quarter of 2015, as well as the gains in 2014, were concentrated in support activities for mining, which includes support for oil and gas extraction.
Employment in food services and drinking places changed little in March (+9,000), following a large increase in the prior month (+66,000). Job growth in the first quarter of 2015 averaged 33,000 per month, the same as the average monthly gain in 2014.
Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, information, financial activities, and government, showed little change over the month.
In March, the average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.5 hours. The manufacturing workweek decreased by 0.1 hour to 40.9 hours, and factory overtime remained at 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.7 hours. (See tables B-2 and B-7.)
In March, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $24.86. Over the year, average hourly earnings have risen by 2.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees rose by 4 cents to $20.86 in March. (See tables B-3 and B-8.)
Analysts: Rate Hike Now On Hold
It shouldn't take too much contemplation to figure out that the US economy has been decelerating in terms of growth, economic activity is becoming increasingly tepid, and the brightest spot of all - its labor market - just got slammed in March. We have a feeling the markets will soon inherit the trepidation it needs for rational moderation.
The market's reaction to the payrolls report was instant. The dollar was offered hard, equity futures were sold, bond futures were very bid with the short end out performing the curve. Most of the markets were closed on Friday for Easter but in the short while US futures markets were open, trading occurred in a frenzied manner. Equity futures closed some 1% lower by mid-day. The real action was really in the currency markets which remained opened till the evening as usual.
For a long while now, we have been bullish on the US dollar. Our premise was mainly based on the relative strength of the US economy, and on the Fed's guidance and propensity towards monetary tightening while most of the world's other central banks have embarked on their respective paths of loosening monetary conditions.
However, having been through the volatility in both the financial markets and on the economic front, we are on the precipice of shifting our stance to being intermediately bearish the dollar. We will not discus our premise for this shift in stance, but we will briefly summarize.
We feel the long term trend in the US dollar is still up. Only a significant change in Fed interest rate and monetary policy guidance will be a large enough catalyst to alter this fundamental trend. However, the market looks as though it is heavily imbalanced at this point, especially when we take into account Friday's dismal jobs report and the flurry of previous misses on consensus.
As ugly as Friday's jobs data was, we must caution against jumping to unnecessary conclusions. We give the economy the benefit of the doubt, that March's bad jobs data was an outlier. A singularity until proven otherwise. As we stated in our previous note, markets will be ever more sensitive to data. Their tendency to over-read each data print will be the main cause of bidirectional volatility in both the dollar and dollar-based assets.
In closing, several investment banks including JP Morgan and Goldman have expressed their revised outlook on Fed policy. The general direction seems to have tilted to the dovish side. Regardless of speculation, understand that Friday's price action was fully reactionary to an unexpected negative surprise. Whether March's epic miss will be worth its salt depends on the follow through we get in the weeks to come. It is still too early to fairly determine if Fed guidance on interest rates have changed.