December’s U.S. nonfarm payrolls report completely smashed expectations with 292k jobs created versus a forecast of 200k jobs. Unfortunately the 92k upside surprise along with the 41k upward revision to November’s numbers failed to help USD/JPY. When the labor-market report was first released, USD/JPY soared to a high of 118.36 but it gave up all of those gains shortly thereafter. The problem was wage growth – it dropped for the first time since 2014. In our nonfarm payrolls preview we talked about how job growth needed to exceed 300k to save the markets and while the actual release came very close, wages were key. Had the labor-market report been unambiguously positive with every underlying component holding steady or improving, USD/JPY would have cleared 119. But average hourly earnings fell -0.04%, which was significantly worse than the market’s 0.2% forecast. Also, wholesale trade sales fell sharply, raising concerns that Q4 GDP will be revised lower. However considering that annualized earnings growth increased to 2.5% from 2.3% and the participation rate ticked up to 62.6% from 62.5%, not all is lost. There’s no doubt that the U.S. labor market is improving but market volatility will determine whether the Federal Reserve raises interest rates in March. We should get a sense of how much the moves in China and the losses in U.S. equities affected the views of policymakers next week with the busy Fed speak calendar. Aside from that, retail sales will be the key report to watch and despite the strong jobs number, expect lower gas prices and weaker wages to have slowed consumption during the holiday season.
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
