3 Implications & Breakdown of Jan NFP Report

Today's non-farm payroll data came in very strong with an uptick in manufacturing hiring adding to robust gains in the services industries. This has strong implications for risk assets, and the prospects for the US economy as well as for global growth. The reaction was a strong gain in US equities, and very good performance by commodity currencies against the European higher yielders. The USD had a mixed reaction, declining against the AUD, NZD, and CAD, but strengthening against the EUR and GBP, and the JPY.

Breaking Down the NFP Report:

The 243K increase in January beat expectations by almost 100K. It shows that the economy is gaining momentum after the drop in activity during the summer (debt ceiling debate/crisis).

The unemployment rate meanwhile, dipped to 8.3%, also uprising forecasts to the topside where expectations were for the unemployment rate to hold steady at 8.5%.

A Look at the Establishment and Household Surveys:

Let's take a look at these both little bit more closely.

In the Establishment Survey is where we get our payrolls figure, which at 243K was the best since last April. There was a good distribution of jobs throughout sectors as manufacturing (50K), professional and business services (70K), education and health care (36K), and leisure and hospitality (44K) all added to the month's job growth. At the same time the number of government workers being laid off has slowed to 14K. It's a sign that recent job growth may be sustainable, if various sectors can participate.

Looking at the Household Survey - from which we get the unemployment rate - we see that the number of people NOT in the labor force rose by almost 1.2 million, which knocked down the participation rates by .3 percentage points to 63.7%.

While at the same time the number of employed increased by around 900K - a positive - and the number of unemployed fell by around 300K. The decline in the labor participation rate is a concern as it means more able bodies are dropping out of the labor force either because they're unable to find work, are retiring early, or are looking for other opportunities such as going to school. The more people that drop out of the labor force, the lower the potential for the economy, though they can re-enter the labor force once the economy shows more sustainable growth and hiring picks up (which would mean an increase in the unemployment rate).

3 Key Implications of NFP on Markets and Economic Outlook

1. Impact of Non-farm Payroll on US Economy

The implication for the US economic outlook following January NFP report is a positive one. It shows that the momentum that the economy picked up at the end of the fourth quarter has extended into the first month of the first quarter, with private companies less shy to hire workers. More jobs means more incomes and better prospects for both consumer spending and the housing market. Households are much more inclined to take on big financial purchases like a home when their labor market prospects are brighter.

Today's report showed that average wages increased 0.2%, matching forecasts. Wages are important to the US economic prospects because for consumer spending in the US to be sustainable there needs to be both an increase in the amount of jobs as well as the incomes.

Overall, today's report should give more justification for the risk rally seen in US equity markets over the last month and a half.

2. Impact on FOMC/Federal Reserve

The second key impact of today's report - especially when it comes to the currency markets - is what it means for the prospect of more quantitative easing by the Federal Reserve. Bernanke left the door open for more quantitative easing last week following the FOMC interest-rate decision and press conference. That helped precipitate a decline in the US dollar since then.

Today's NFP report may push back speculation about more QE coming in the next few months, as an improving labor market would be key to the FOMC believing that its earlier loose monetary policy is paying off.

Less chance of Fed undertaking QE in the short term is a USD positive and compared to European currencies in which the central banks are expected to expand their balance sheets - the Bank of England and the ECB - the US Dollar gained against the euro and pound in the initial reaction to the report.

We can also observe a key reaction in gold, which sold off following today's report, as the smaller chance of more QE makes gold less important as a hedge against central bank money printing.

3. Impact on Global Growth and Commodity Currencies

The 3rd impact of today's NFP is that stronger US job growth means stronger economic growth which is positive for the global economy. The commodity currencies - the AUD, NZD, andCAD - all benefited from today's report climbing strongly against the Japanese yen, the euro, and the pound, while also strengthening against the US dollar.

Since the US dollar had some support based on the changing expectations around speculation of QE by the Fed, the commodity currencies strength was much more evident in non-USD commodity currency crosses, especially against the the European higher yielders (EUR and GBP) and the JPY.

The start of next week can see some positive carry-over when Asia opens, and overall the report can bolster optimistic viewpoints on the US economy and therefore risk assets as well as higher yielding commodity linked currencies.

We will continue to monitor the negotiations around the second Greek bailout and private sector involvement by Greek bondholders throughout the weekend as a key risk-off risk event.