Well the NFPs have posted a very solid result, as expected but there are some surprises with it as well that are cause for concern, but I will get to that in a moment. The first point I want to clarify is what these results mean. All payrolls posted excellent results for December and had strong upwards revisions for November. This shows a continued firming of the labor market and shows that more and more people are joining the labor force. This is one of the clearest signs of a healthy and productive economy and is evidence that the US, the worlds largest economy, is headed in the right right direction and NOT declining. As labor was one of the FEDs primary concerns, I would expect this report to put them at ease and believe that while they will not do anything at January’s meeting, they will be bullish and have a view to possibly raise by another 25 bps in March. Since the rates market shows that the market is pricing in a less than 50% chance of a raise before June, I believe that this will be positive for USD strength over the next week (as soon as markets calm down more).
Now for some concerns over this report. I did feel that a result over 200k, would bring down unemployment to 4.9%, however in this case, I was wrong and the consensus was right. That is not overly concerning. What is surprising is that wages. I felt that such a firming labor market would put pressure on wages to increase. However, it has not and I do not understand why. In order for inflation to pick up, wages must rise. This is critical to our outlook and our expectation of 3 rate increases in 2016.
Another concern is that if we look at the manufacturing payrolls, 8,000 jobs were added. This contradicts the weak ISM Manufacturing PMI Survey released earlier this week which showed contracting. Perhaps, the survey was not a true indicator this month and did not tell the whole story but at this point, I am left puzzled by the conflicting data. It makes no sense.
Regardless, I fancy the USDJPY at the these levels and will be looking to load up on many mid leverage buys as soon as risk aversion completely subsides from this market. When will this be? As I said two days ago, I do not know and I would not be overly surprised if it persists untill the 19th of January when the Chinese release their GDP data.
Have a good weekend everyone,