Economy Adds 261,000 Payrolls. Where Next for the US Dollar?

OCTOBER JOBS REPORT KEY POINTS:

• The U.S. economy added 261,000 jobs in October compared to a forecast of 200,000. Meanwhile, the unemployment rate edged up to 3.7%, one-tenth of a percent above expectations
• Average hourly earnings climbed 0.4% on a monthly basis and 4.7% year-over-year. Analysts polled by Bloomberg News were looking for a 0.3% m-o-m and 4.7% y-o-y gain
• Resilient labor market could mean higher-for-longer Fed interest rates

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Updated at 9:05 am ET

MARKET REACTION

Immediately after the NFP report crossed the wires, the U.S. dollar and Treasury yields whiplashed, but then began to move counter-intuitively lower. However, this reaction could soon fade once traders digest the numbers and recognize that the U.S. labor market remains extraordinarily resilient and that wage pressures are not cooling at a fast enough pace.

The October CPI report, to be released next week, could provide more clues about the Fed’s next steps in terms of future hikes, but strong labor demand plays against the idea that policymakers will shift to a slower pace of interest rate increases as early as December.

Source: TradingView

Original post at 8:40 pm ET

U.S. employers continued to add to their ranks at a strong pace at the start of the fourth quarter for a country experiencing very weak growth and numerous other challenges, a sign that America’s job machine is still firing on all cylinders despite heightened economic uncertainty due to rising interest rates and persistently high inflation.

According to the Department of Labor, the economy added 261,000 nonfarm payrolls (NFP) in October, versus the 200,000 expected, following an upwardly revised increase of 315,000 in September. The jobless rate, meanwhile, inched up to 3.7% from 3.5%, one-tenth of a percentage point above estimates.

The Fed is deliberately trying to slow hiring to tame inflation, in part by destroying some demand in the economy, but today’s data show that its actions are not yet having the desired effect, as the labor market remains extremely tight by historical standards. This situation may prompt policymakers to stay on a hawkish hiking path over an extended period of time in their quest to restore price stability.

NONFARM PAYROLL DATA AT A GLANCE

Source: DailyFX Economic Calendar

Elsewhere in the NFP survey, average hourly earnings, a key inflation gauge closely monitored by policymakers, rose 0.4% on a seasonally adjusted basis, bringing the annual rate to 4.7% from 5.0% previously, matching forecasts.

This small moderation in income growth, while disappointing for most Americans who have seen their real incomes fall this year, will be welcomed by the central bank, as easing wage pressures may help bring CPI readings down over the medium term, although the transmission mechanism does not play out overnight.

US DOLLAR IMPLICATIONS

All in all, resilient labor demand is unlikely to provide cover for the Fed to downshift the pace of hikes immediately, but the inflation numbers next week will clear up any doubts. In addition, the terminal rate could continue to drift higher on hawkish repricing of the FOMC monetary policy outlook, pushing up U.S. Treasury yields along the way. Against this backdrop, the U.S. dollar could retain leadership in the FX market.

Source: TradingEconomics

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—Written by Diego Colman, Market Strategist for DailyFX