Sample Category Title

Over the past three months, labor market gains in the form of jobs and wages support consumer spending and a continued domestic economic expansion. Labor force participation remains a long-term issue.

Jobs Up 235,000 in February: Solid Hiring Start in 2017

Nonfarm payrolls rose a solid 235,000 in February, boosting the three-month average to 209,000. Gains were strong across the private sector, with employment rising by 227,000 and an additional 8,000 jobs in the government sector. Retail was the one area of weakness–down 26,000. Manufacturing employment posted another monthly gain (up 28,000), matching the largest monthly increase since mid-2013. Construction hiring was solid at 58,000 but was likely helped by mild winter weather.

Outside the goods-producing industry, there has been broad-based strength in job growth over the past year, particularly in business services, education & health and leisure & hospitality (top chart). These gains are consistent with solid consumer spending and continued economic growth. Aggregate hours worked are up 3.1 percent on a three-month annualized rate, which is consistent with domestic strength. We currently project real final sales to grow 2.0-2.5 percent in the first quarter, but headline real GDP growth will likely be a lower 1.5-2.0 percent due to the drag on growth from trade and inventories.

Average Hourly Earnings Gains Sustained

Average hourly earnings rose 0.2 percent in February and are up 2.8 percent year-over-year, sustaining recent gains and providing further support for a March rate hike. As illustrated in the middle chart, the pickup in wages has been modest compared to prior cycles. With economic growth and wage growth still far from a break-out pace, the Fed will likely continue to take its time tightening policy for the remainder of the year.

However, the pace of wages does not reflect gains in benefits and the impact of longer hours worked, particularly in both durable and nondurable manufacturing. Our proxy for aggregate income growth is up 4.7 percent on a three-month average annualized basis, supporting the case for continued gains in consumer spending—no slow down there.

Aggregate Demand or Supply? Depends on Your Time Horizon

Growth does not live by stimulating aggregate demand alone. To achieve and maintain economic growth over three percent without accelerating prices, policymakers are challenged to stimulate the supply-side of the economy. The labor force participation rate rose again in February to 63.0 percent. The prime-age participation rate also increased slightly, reaching its highest level since 2011 (bottom chart).

However, labor force participation rates face long-run, secular headwinds that go beyond a short-run cyclical improvement drawing workers back into the labor market. There is no quick fix, but focusing on improving both the quality and quantity of the labor force will be key to driving faster, sustainable economic growth.

USD/CHF - 1.0100

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0115

Kijun-Sen level                    : 1.0120

Ichimoku cloud top                 : 1.0147

Ichimoku cloud bottom              : 1.0145

Original strategy :

Bought at 1.0100, Target: 1.0200, Stop: 1.0070

Position : - Long at 1.0100

Target :  - 1.0200

Stop : - 1.0070

New strategy  :

Hold long entered at 1.0100, Target: 1.0200, Stop: 1.0070

Position : - Long at 1.0100

Target :  - 1.0200

Stop : - 1.0070

As the greenback has slipped again after brief bounce to 1.0142, suggesting further consolidation would be seen but as long as support at 1.0073 holds, mild upside bias remains for another rebound, above said intra-day resistance would bring retest of 1.0171 but break there is needed to confirm recent erratic rise from 0.9861 low has resumed and extend further gain to 1.0200-10 but overbought condition should limit upside to 1.0220-25 and price should falter below previous chart resistance at 1.0248.

In view of this, we are holding on to our long position entered at 1.0100. Below said support at 1.0073 would abort and signal top has been formed instead, risk weakness to 1.0040-45 but reckon support at 1.0009 would remain intact. 

GBP/USD - 1.2157

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2164

Kijun-Sen level                    : 1.2165

Ichimoku cloud top              : 1.2177

Ichimoku cloud bottom        : 1.2165

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As cable has recovered after holding above support at 1.2135, suggesting consolidation above this level would be seen and corrective bounce to 1.2210-15 is likely, however, reckon upside would be limited to 1.2245-55 but price should falter well below resistance at 1.2301, bring another decline later.

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Below said support at 1.2135 would signal recent decline has once again resumed and extend weakness to 1.2100, however, loss of near term downward momentum should prevent sharp fall below 1.2070-75 and price should stay above 1.2050, risk from there is seen for a rebound later.

EUR/USD - 1.0629

Most recent candlesticks pattern   : N/A

Trend                      : Sideways

Tenkan-Sen level              : 1.0620

Kijun-Sen level                  : 1.0597

Ichimoku cloud top             : 1.0557

Ichimoku cloud bottom      : 1.0548

Original strategy  :

Buy at 1.0560, Target: 1.0660, Stop: 1.0525

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0560, Target: 1.0660, Stop: 1.0525

Position : -

Target :  -

Stop : -

As the single currency has surged again after brief pullback and broke above previous resistance at 1.0640, adding credence to our bullish view that the erratic rise from 1.0493 low is still in progress and may bring retracement of early decline to 1.0660-65 (50% Fibonacci retracement of 1.0829-1.0493) and possibly towards resistance at 1.0680 but price should falter well below 1.0700-05 (61.8% Fibonacci retracement).

In view of this, we are looking to buy euro on dips as 1.0560-70 should limit downside and bring another rise later. Below said support at 1.0525 would abort and risk test of 1.0493-96 but only break there would shift risk back to the downside and signal recent decline from 1.0829 has resumed for further selloff to 1.0470 and then towards previous support at 1.0454.

USD/JPY - 115.28

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 115.29

Kijun-Sen level                  : 115.02

Ichimoku cloud top             : 114.56

Ichimoku cloud bottom      : 114.28

Original strategy  :

Buy at 114.90, Target: 115.90, Stop: 114.55

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 114.50, Target: 115.50, Stop: 114.15

Position :  -

Target :  -

Stop : -

As the greenback has retreated after intra-day marginal rise to 115.51, suggesting consolidation below this level would be seen and pullback to 115.00- cannot be ruled out, however, reckon downside would be limited to 114.75 (previous resistance now support) and bring another rise later, above said resistance at 115.51 would extend recent upmove to previous resistance at 115.62, then towards 115.90-00 which is likely to hold from here.

In view of this, would not chase this rise here and we are looking to buy dollar on pullback as 114.70 should limit downside and bring another rise. Below 114.40 would risk test of support at 114.26 but break there is needed to signal top is formed instead, bring correction to 113.90-95 first. 

The market expectations of a probable US interest rate increase in March were fully cemented by February's solid NFP headline figure of 235k which illustrated steady growth in the US labour markets. Although average hourly earnings may have missed expectations, the unemployment rate fell to 4.7% simply displaying US labour force resilience in a period of uncertainty. Economic data from the States continues to follow a positive trajectory and with the positive US jobs data adding to the basket, the prerequisites needed for the Fed to pull the trigger next week have been successfully achieved.

Although some concerns may still linger in the background regarding the ongoing Trump uncertainties, today's data has visually shown that wages grew and employment rose in the first month of Donald Trump's presidency. The overall economic outlook for the US continues to look encouraging with further gains expected on the Dollar as speculators bet on the Fed raising US interest rates beyond March.

It should be kept in mind that the depreciation of the Dollar following the firm US jobs data has nothing to do with a change in sentiment, but potential profit-taking ahead of the weekend. The technical correction may come to an abrupt end with bulls back in action when the Federal Reserve raises US interest rates next week.

From a technical standpoint, the Dollar Index bulls need a solid break and weekly close above 102.00 to open a path higher towards 102.50.

• Employment rose 235k following a revised 238k (was 227k) increase in January. Private-sector jobs rose 227k (up from 221k in January) with government jobs up 8k following a 17k January gain.
• The unemployment rate declined to 4.7% from 4.8% in January

The February employment gain was boosted by a 95k surge in private sector goods-producing jobs (the largest monthly gain since March 2000) with construction employment up 58k (to build on a 40k jump in January) and manufacturing sector headcount up 28k to mark a third consecutive solid monthly gain. Private service-sector job growth slowed to 132k from 167k in January. Employment in the retail sector declined 26k after a 40k jump in January.

The dip in the unemployment rate (calculated from the separate household survey) occurred despite a tick higher in the participation rate to 63.0% from 62.9% in January.

Hours worked inched up 0.2% in February and 1.4% from a year ago. Hourly wages also rose 0.2% from January and the year-over-year rate ticked up to 2.8% to retrace most of a dip to 2.6% in January from (a cycle high) 2.9% in December.

Our Take:

Given comments from Fed officials, including Chair Yellen, in recent weeks, it would likely have taken a significant downside surprise to derail market expectations that were already pricing in about 90% odds of a 25 basis point hike to the fed funds target range following next week's FOMC meeting before the release of today's numbers. Although the earlier-reported 299k surge in private employment in the ADP report earlier this week may have boosted some expectations for today's job growth numbers to unrealistic levels, solid employment growth (well-above the underlying 'trend' rate), a dip in the unemployment rate, and a tick higher in wage growth should all provide reassurance that labour markets continue to tighten. We continue to expect a 25 basis point rate hike from the Fed next Wednesday. With an increase in rates, barring some unexpected shock, appearing very likely, attention is likely to shift to the expected pace of future hikes (Previous Fed projections suggested three hikes were felt to be appropriate this year) with a stronger economy arguing higher rates are needed but with considerable uncertainty remaining in the outlook, particularly around the future of U.S. government policy.

• 15K jobs created in February while labour force dipped by 19.6K pushing unemployment rate to 6.6%
• Today's labour market report went some distance to allay concerns about the mix of part-time and full-time job creation with 105K full-time positions created and 89K part-time jobs lost. In the first two months of the year, full-time employment grew 121K.
• Service sector employment rose 30K while goods producers cut 15K positions
• The unemployment rate fell 0.2 ppt to stand at the lowest level since November 2008
• Participation in the labour market fell in February however 175K more people were in the labour force than a year earlier
• Hours worked rose 0.2% from January; pace of decline from a year ago eased to -0.3% from -0.8%
• Wage growth remains tepid, earnings for permanent workers rose 1.1% from February 2016

Our Take:

Another, albeit more modest, rise in employment in February kept the string of gains running that started last summer just as the economy shifted into higher gear. The stronger growth generated increased demand for labour and a rise in capacity usage with the utilization rate touching a two-year high in late 2016. These reports may give the Bank fodder to reassess the degree of "persistent economic slack in Canada". The wage numbers however have been surprisingly weak and appear out of whack with strong employment gains with the six-month run rate at 36K. Given the lag between job creation and higher wage demands, a recovery in wage growth is likely to materialize later this year. Additionally, the rebound in commodity prices and stronger growth are fueling expectations that inflation will move higher, not lower as was the concern early last year. In its March statement, the Bank also went out of its way to contrast conditions at home with those in the US delivering a clear message that even if the Fed ramps up the pace of rate increases, hikes in Canada are a long way off.

It may not have been the knockout NFP that the ADP release on Wednesday indicated it could be, but today's US jobs report was more than adequate to justify a rate hike next week, assuming of course that the markets have correctly interpreted the Fed's very deliberate hawkish delivery over the last few weeks.

It's difficult to find anything to be down about in the jobs report, with job creation being well above the 12 month average and far exceeding what the Fed deems to be good enough. Unemployment fell even as participation rose to 63% - only the second time it's reached that level since April 2014 - while average hourly earnings rose to 2.8% year on year, not quite good enough yet but heading in the right direction.

All things considered, if the Fed was keen to raise interest rates next week, as it indicated it is, then today's report will only have aided the decision. The dollar may well have weakened following the release but this is probably due to the NFP number falling short of the ADP reading which raised people's expectations. The only thing standing in the way of a rate hike now is the Fed itself but after its efforts over the last few weeks, surely even it won't bottle it now.

The drop off in the US dollar has triggered some interesting moves, for example in EURUSD, where the pair has broken above the range it has been contained within for almost three weeks. As of yet, the breakout has not triggered a substantial move to the upside, which could be expected if a large number of stops had been triggered. Perhaps this suggests we're seeing a false breakout and the pair will once again settle back inside the range. Alternatively, another move above today's highs could break down what's left of the resistance, with the next notable level coming around 1.0680.

The commodity currencies have been particularly battered as of late, with dollar strength and its impact, among others, on dollar-denominated commodities delivering a double blow to them. The AUDUSD is getting some relief following the jobs data, just as a very important support, around 0.75 was coming under significant pressure. With 0.7550 currently proving to be a strong resistance level to the upside - prior support - the relief may not last very long but as long as the pair doesn't break above 0.7633 - this week's high - then 0.75 may not be out of the woods quite yet.

Non-farm payrolls increased by 235k in February, or well ahead of the 200k expected by the street. Revisions to the previous two months' of payrolls added 9k positions with January hiring now reported as 238k.

Private payrolls rose by 227k, some 12k above the consensus expectations for 215k. Private services hiring was led by health care & education (+62k), business services (+37k), leisure & hospitality (+26k) and transport (+16k). Goods hiring was nothing short of phenomenal, with construction (+58k) and manufacturing (+28k) both having great months, with mining & logging (+9k) even adding to the mix. Government hiring (+8k) was modest, with federal level hiring (+2k) up despite a hiring freeze put in by the new administration.

The unemployment rate ticked down by 0.1 percentage points to 4.7% as the huge gain in employment was more than enough to offset the number of people re-entering the labor force. The additional influx has lifted the participation rate up by 0.1pp to 63.0% on the month - the highest level in nearly a year. Other underemployment measures were also lower, with the broadest measure (U-6) down 0.2pp to 9.2% - matching its level of April 2008.

Average hourly earnings rose by 0.2% during the month, slightly disappointing expectations for a 0.3% m/m print, but this came atop of upward revisions to the previous months. On the whole, the year-over-year wage growth accelerated from 2.6% to 2.8% in February.

Average weekly hours were unchanged at 34.4.

Key Implications

This was a solid employment report any way you slice it. The headline blew past expectations, already elevated given the outsized ADP print mid-week. Moreover, the hiring was very broad, with the number of industries showing increases at its highest level since December 2015 - with all but retail and utilities adding jobs on the month. The same was true for manufacturing industries, with the diffusion index at its highest level in more than two years. Mining too, showed resilience, adding jobs for the fourth consecutive month - underscoring the notion that the worst is behind the sector.

The one note of caution has perhaps to do with some of the seasonality that could have crept into the data, particularly in weather-affected sectors. A mild Northeastern winter could have brought forward many construction projects and hiring, something that was apparently not offset by the heavy-rains in California. This suggests that some caution may be warranted as far as hiring across these sectors in the coming months.

Interestingly, the wage print, while decent at 0.2% m/m in both February as well as in the month prior, did not show as much strength as was anticipated, particularly given the implementation of minimum wage legislation across 19 states in January. Having said that, at 2.8% on a year over year basis, and with broad improvement in underutilization measures, we think this report all but solidifies a rate hike from the Fed next Wednesday, with two more likely to come later this year.