Mixed jobs report unlikely to impress Trump administration

The first US labour market report since Donald Trump took office may have delivered the goods on the headline figure, Non-Farm payrolls rose by a healthy 227k, vs. 180k expected, however, the report also had pockets of weakness which may not impress the Trump administration.

The unemployment rate rose to 4.8%, from 4.7%. We wouldn’t worry too much about this small increase; after all, unemployment can rise in January as seasonal workers are let go after the Christmas season. Of more concern was the drop in wage growth. Average hourly earnings growth was 2.5%, less than the downwardly revised 2.8% in December. This is the lowest reading for hourly earnings since August 2016, and defies expectations for rising wages on the back of January bonus payments.

The underemployment rate, which measures those who have left the workforce or those in part time work who would like a full time position, also rose to 9.4% from 9.2% in December. However, this is still one of the lowest rates since the financial crisis in 2008, although it remains significantly above the 6.9% low reached in 2000. So Yellen and co. seem to be right when they say that the labour market recovery has further to go, which may lead to a small scaling back of rate hike expectations from the Fed later this year.

There was some more good news, weekly hours worked improved last month, and the labour force participation rate also rose to 62.9%, reversing weakness at the end of 2016.

Market reaction is muted, although bond yields lower

Overall, this was a mixed report. The dollar initially reacted positively, however, within minutes the dollar index backed off highs as the FX market took stock of some of the weaker elements of the report. US stock market futures moved higher and are predicting a stronger open for the Dow, S&P and Nasdaq. However, the bond market was less impressed, and US treasury yields fell across the curve, the two-year yield is currently down 5 basis points, which could weigh on the buck further on Friday.

NFPs and the Fed

We don’t think that today’s NFP report, on its own, will be a game changer for the Fed, and the market is still pricing in the prospect of another rate hike from the Fed by mid-year; after all wage growth at 2.5% is still above the Fed’s target inflation rate. However, we will be watching the development of wages, which are a key metric for the Federal Reserve going forward. If they don’t pick up again for February then Federal Reserve rate hike expectations may start to get pushed further out to the second half of 2017, which could limit dollar upside in the medium term.

Watch what Donald Trump has to say

There are two things today that could determine where US asset prices close the week; the first is any reaction to the labour report from Donald Trump. Will the President want to take credit for the 227k jobs created? Or will he lament the rise in the unemployment and the underemployment rate? It is worth noting, that Trump’s team want to scrap the unemployment rate and make the underemployment rate the key gauge for the health of the US labour market. Thus, it will be worth watching Trump’s twitter account for any potential reaction to the increase in both of these rates and the disappointing wage data. In fairness, it puts pressure on Trump to disclose his economic plans in more detail, which is something the market desperately wants to hear.

The second thing to watch is the US non-manufacturing ISM report for January, which is released at 1500 GMT today. This is a key gauge of US economic health, and the market expects a solid reading of 57.0. Any disappointment could set the dollar back even further.

Overall, the market reaction to the labour market report has been one of mild disappointment so far.