- Bad weather looks to be behind the weak December employment report…
- …and it could hit the January numbers as well…
- …but fundamentals point to a rebound in coming months
- Weak labour market report hurt the US dollar and equities, but supported Treasuries
Just when everything was looking so rosy
US nonfarm payrolls rose by just 74K in December, which was much weaker than the consensus forecast for a 203K rise and quite a slowdown from a revised reading of 241K in November (from 203K previously). The unemployment numbers looked good at first sight, with the unemployment rate plummeting to 6.7% from 7% in November, but this reflected a sharp fall in the labour force. Indeed, the participation rate dropped to 62.8% from 63%, suggesting that the drop in unemployment was actually also a sign of weakness. The poor report was a real surprise given the broad based strength in the US economic data over recent weeks, which have made a rather convincing case that the economy is really stepping up a gear and finally shaking off its troubles.
Weak labour market report probably due to weather
Fortunately, the poor jobs report looks to be down to unseasonably bad weather. This can be seen in the Bureau of Labour Statistics’ measure of people not at work due to bad weather. This surged in December of this year to 273K, which is much higher than the long-term average for December of 135K, and the highest December reading since 1977. In addition, as explained above, other indicators suggest that the economy and the labour market have continued to do well. So we suspect that without the weather-related distortion, nonfarm payrolls would probably have been comfortably above 200K. Indeed, the private sector employment reading of the ADP report earlier in the week reported a 238K rise in December. Why the ADP report was not affected by the weather is certainly a bit of a mystery. Looking forward, it seems likely that January’s labour market report might also be distorted by the bad weather. Other economic data may also start to show some softness as well. However, we would expect the labour market data – and any other affected reports – to rebound strongly in the months ahead.
Fed should look through this
The weak report has increased speculation that the Fed may pause from tapering later this month. However, we think it will look through the numbers, as there is a clear reason for the weakness. We therefore continue to expect a second USD 10bn reduction in the pace of purchases at the January FOMC.
Treasuries supported, dollar and equities decline
The much weaker than expected labour market report left its mark on financial markets, as investors speculated that the economy might not be as strong as expected and that the Fed might pause its tapering of asset purchases and push back rate hikes even further into the future. Treasury yields fell sharply, especially in the belly of the curve as implied rates on Eurodollar futures for 2016-2017 plummeted. These views were also reflected in the currency markets, where the US dollar dropped across the board. EUR/USD moved back above 1.3650 while USD/JPY dropped below 104.50. Gold and other precious metals predictably welcomed the weak US employment print. Finally, global equity markets fell, apparently focusing on the uncertainty related to the economy, rather than the possibility of delayed tapering.
Market moves look likely to reverse
Given that the weakness in the labour market report is weather-related, and that the fundamental strength in the economy will re-assert itself before long, it does not seem likely that these moves in financial markets will be sustained. We expect strong economic prospects and gradual Fed tapering going forward. Investor sentiment should be supported, risky assets and the dollar are expected do well, Treasury yields should embark on a gradual upward trend, while gold prices will resume their slide.