NFP Recap Low wage growth offsets stellar jobs beat

The most closely-watched aspect of the US jobs report came out much better than expected on Friday, showing that the US economy added a stellar 227,000 jobs in January, significantly more than the 170,000 or so that were forecast. Pre-indicators earlier this week like the ADP private employment report and ISM manufacturing PMI employment had helped to telegraph a positive non-farm payrolls (NFP) number.

The US dollar’s response to this very substantial jobs beat, however, was much less than positive. In the immediate aftermath of the jobs release, the dollar dropped sharply, while gold and equity markets climbed further, as the market-viewed probability of a rate hike by the US Federal Reserve in mid-March was essentially cut in half to below 9%. This significantly more dovish rate outlook was reinforced on Friday by Chicago Fed President Charles Evans, who stated that "appropriate policy calls for a slow pace of normalization."

What aspect of Friday’s jobs report contributed to these lowered Fed expectations amid persistent market optimism for economic growth under the new Trump Administration? The unemployment rate inched up from the prior month to 4.8% against expectations of 4.7%, but this was not the critical factor. It was largely the consideration of low wage growth that put a significant damper on the outlook for near-future Fed rate hikes. A key indicator of labor and consumer inflation, average hourly earnings in January rose by only 0.1% (3 cents) against expectations of a 0.3% increase. Furthermore, December’s previously better-than-expected 0.4% increase has now been revised down to 0.2%. This lower-than-expected inflation indication is likely, in turn, to help mitigate the Fed’s previously hawkish stance.

What could this mean for the fate of the US dollar, gold, and equity markets going forward? As the Trump Administration continues to extend its pro-growth, pro-business agenda, while the Fed remains hesitant in normalizing its still-accommodative monetary policy, equity markets should continue to benefit from the Trump-driven rally in the short-term. At the same time, the US dollar is likely to be pressured further, as it has been since the beginning of the year, as the promise of accelerated Fed tightening fades for the time being. Meanwhile, gold prices are apt to remain supported in the face of a weaker dollar and potentially slower interest rate increases on the immediate horizon.

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