February 3, 2023

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How much does the US non-farm payrolls blip matter?

2 min read

Does the market really care about one bad miss on payrolls?

As we get into trading today, it is still all about digesting and gauging the reaction to the surprisingly poor US jobs reports on Friday here.

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However, taking the numbers at face value, what does it really mean and what is the market reaction telling us so far?

The bond market reaction was interesting, but traders firmly believe that this is an outlier. The knee-jerk reaction saw 10-year Treasury yields slump to 1.48% but have now recovered back to be closer to 1.60% to start the new week.

In that sense, yields are siding with the narrative that the economy is going to run hot and inflation – transitory or not – is going to be high in the months ahead and that may possibly force the Fed’s hand sooner rather than later.

That said, we’re still not seeing signs of yields running back towards the recent topside ceiling close to 1.75% so there is still room for trepidation at these levels.

The equities reaction is rather straightforward. The softer report just means the Fed will have to keep accommodative policy for longer i.e. the BRRR!!! machine continues to churn out them dollars and easy money makes for a good reason to stay invested.

Sure, there are concerns about high valuations and stretched levels but unless there is a real switch in tone by the Fed, expect dips to continue to be bought into.

In any case, even if this is a blip, that just means other data releases will continue to reaffirm a more solid economic recovery and with the Fed instead honing in on this, it just keeps the Goldilocks theory well in tact.
In FX, the dollar was beaten up rather ferociously and despite yields rebounding on Friday, the greenback never recovered and is keeping vulnerable today.

As much as the dollar has put up a modest showing this year, the same reasons why there was such a bearish undertone at the end of last year are still persisting today. Any setback to the Fed taper timeline only serves to dent the greenback’s resilience even more.

The technicals may be suggestive of some short-term pressure and a further drop. After all, it is hard to fight the charts when they are suggesting so across multiple fronts.

However, unless the Fed taper narrative starts to be derailed and this non-farm payrolls blip proves to be more than a one-off, then only perhaps we can start talking about a sustained decline in the dollar in 2H 2021 as well.

Otherwise, I would presume that the greenback will show signs of weakness from time to time but as long as the market keeps invested in the narrative that the Fed will start to tighten policy sooner rather than later, the dollar should see some resilience too.

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