- The US gained only 20K jobs in February and the US Dollar dropped.
- The acceleration in wages and the effect of the government shutdown should allay fears.
- The US Dollar has room to rise, especially as the other currencies have their issues.
The American economy gained a meager 20K positions in February, far worse than expected: 180K and well below the upwards-revised gain of 311K in December. The USD initially dropped.
But this may not be the correct reaction.
5 reasons to be positive:
1) Shutdown: The US government shutdown is behind part of the skewed data. The BLS mentioned that the numbers suffered the return of some furloughed workers to the fold. The longest shutdown in history may further distort the data, so the disappointment should be taken with a grain of salt.
2) Payback month: This is not the first time that we had a disappointing jobs report and this one comes after tremendous gains beforehand: 311K in January according to the revised data. December was revised as well.
3) Wages: Growth in salaries remain critical for the market reaction. The monthly rise of 0.4% and the acceleration to 3.4% are not only better than expected but the annual rise represents a new cycle high.
Higher wage growth may lead to higher inflation and thus to rate increases after the current period of patience.
4) Unemployment falls on stable participation:The topline unemployment rate is politically significant but traders tend to look at it only in the context of the participation rate. The jobless rate dropped from 4% to 3.8% while the participation rate remained unchanged at 63.2%. This is good news.
5) Underemployment plunges: If you don’t believe the headline number, there is a wider one. The broader U-6 unemployment rate takes discouraged people and those who want full-time jobs but work only part-time into account. And this gauge, sometimes called the “Real unemployment rate”, tumbled down from 8.1% to 7.3%.
These reasons support the greenback. The muted fall of the USD may only be the tip of the iceberg.
Exceptional American currency
In addition, it is crucial to remember that the US Dollar remains “the cleanest shirt in the dirty pile”. Just this week, the ECB made a sharp dovish twist, the day after the BOC removed its hawkish bias and two days after China set low growth targets. The BOJ and the RBA have made dovish changes beforehand.
The jobs report not only strengthens the “King Dollar” theory but also leaves the door wide open to the Fed raising rates in the second half of the year. Former NY Fed President Bill Dudley warned that the Fed may still make a move later this year. Does he know something?