The US Bureau of Labor Statistics released its highly anticipated nonfarm payroll (NFP) figures for December 2016 on Friday, with three key results:
- The market added just 156,000 jobs compared to an expected 178,000;
- Average wages, which have increased by an annualised 2.9%, seem to be a driving factor for further US confidence in spite of the disappointing number of jobs added;
- The pound-dollar exchange rate fell from 1.2415 to 1.2266 in its first day of receiving the news. This drop represents the greatest fall in a single day in the last three weeks.
Why The Figures Matter
The nonfarm payroll is a leading indicator of how the US economy is performing in terms of adding jobs. As a result, investors can predict with some significance how the Fed will react with regards to its monetary policy decisions. Many investors are currently predicting the equities market to be overvalued, with Trump’s upcoming presidency being more of a bubble than a forecast of tangible positive changes to the capital markets.
So, while traders are flooding the market with buying orders on cyclical stocks such as those in the banking sector, at the same time many have their fingers on the sell button in case their fears of a crash comes true. In other words, the market has been going up so fast that people are worried it will go down even quicker.
History has also shown that a common theme before a crash is a period of euphoria when investors’ behaviour reflects their irrationality: less hedging, less consideration of the risk-return profile of their investments, and overall over-confidence in their decisions. The smarter investors and those with the most capital are aware of these implications and keep a sharp eye on US data, trying to predict the future and adjust their exposure.
It seems that despite the disappointing number of jobs added, the dollar has gained further confidence from the market. The dollar basket has gained strength over the news, and this must be because of some other factor.
“The most important thing is the growth in average hourly earnings, the best since 2009,” said Scott Clemons, Chief Investment Strategist at Brown Brothers Harriman. He added: “It provides further evidence — I actually think the final piece of evidence — the Fed needs to conclude the labour market has recovered, mission accomplished, giving them the green light to accelerate interest rate increases.”
Clemons was referring to the exceptional growth in average earnings. The 2.9% advance has had far superior importance to investors than the delivery of fewer-than-expected new jobs. As a result, investors piled into the dollar and dollar-denominated equities.
Outlook For The Future
In December, the Fed introduced its first interest rate hike of 2016. This year, it is expected to increase as many as three times. Whether that will happen or not is another question. For the past two years, the market has anticipated several more interest hikes than were actually delivered. It is likely that the jobs data released on Friday will deter the Fed from another hike soon.
Job numbers are down, and, to add to the issue, the US currency has gained further strength. If this bull market continues throughout the first quarter of 2017 then there is likely to be further strength in the dollar. Just how much can the country cope with? Although net importers are enjoying the historically favourable shifts in their exchange rates, net exporters have been severely impacted overall. One should keep an eye out for the coming NFP on February 3rd.