Higher Unemployment Sends the USD On A Retreat

The non-farm employment report from the US was the last one for the week, after yesterday’s stable ISM manufacturing report. Today’s NFP report wasn’t too bad, but the markets have taken it negatively and the USD is retreating lower.

The initial reaction was to sell the USD, likely on the higher unemployment rate. Although the main number for the FED will be the CPI inflation report on September 13. The plunge in gasoline prices has been constructive and other elements like used cars and airline/hotel fares are also negative. Stepping back, there have been some big dollar moves this week and we’re still dealing with the turn of the calendar. Monday is a US holiday and there’s still great uncertainty in Europe and China.

US August Non-Farm Payrolls

• August non-farm payrolls come at +315K vs +300K expected
• July non-farm employment was +528K (revised to 526K)
• Two month net revisions -108K
• Estimates ranged from +75K to +450K
• Unemployment rate 3.7% vs 3.5% expected
• Prior unemployment rate 3.5%
• Participation rate 62.4% vs 62.1% prior (was 63.4% pre-pandemic)
• U6 underemployment rate 7.0% vs 6.7% prior
• Average hourly earnings +0.3% m/m vs +0.4% expected (prior +0.5%)
• Average hourly earnings 5.2% y/y vs +5.3% expected (prior 5.2%)
• Average weekly hours 34.5 vs 34.6 expected
• Change in private payrolls 308K vs +300K expected
• Change in manufacturing payrolls +22K vs +20K expected
• Household survey +440K vs +179K prior

The implied odds of a 75 bps hike at the Sept 21 FOMC meeting were at 75% ahead of the data. The USD moved down after the report was released, with the market focused on the dip in wage growth and rise in the unemployment rate. I’m a bit surprised by the reaction because this is generally good news for the economy and if I was an FOMC member, this would make me feel a bit more comfortable about hiking by 75 bps, though the implied probability is still at 75.0%.

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