Headline Disappoints but Doesn’t Conceal Constructive US Jobs Report

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Cognizant that the initial estimate of August nonfarm payrolls habitually disappoints, market participants (and presumably policymakers) will look past the low 173k increase, and instead focus on the favorable internals.

These include a drop in the unemployment rate to 5.1%, which is into the band which the Fed regards as full employment. In addition the work week rose to 34.6 hours, matching the cyclical high from a revised 34.5 hours in July. Average hourly earnings rose 0.3% to a 2.2% year-over-year rate.

Job growth in July was revised to 245k from 215k, while the June estimate was revised up by another 9k also to 245k. While most sectors added jobs, manufacturing shed 17k jobs in August, which is the most since July 2013. We note that the gap between the service ISM and manufacturing ISM is the widest in several years. Moreover, the frustratingly lowflation is a function of deflation in goods prices and above 2% inflation in the price of services.

There were a couple of mitigating factors besides the loss of manufacturing jobs and weakness in the headline nonfarm payrolls that are worth mentioning. The participation rate failed to rise, and instead remained stuck at 62.6%. The consensus expected a small increase. In addition, part of the increase in hourly wages may be a function of a survey period ending on August 15, when bimonthly payroll checks are often distributed, which could skew the data. Nevertheless, on balance the report appears broadly consistent with recent trends, showing the US labor market continues to heal and slack continues to be absorbed.

Canada also reported its August jobs figures. Although the unemployment rate rose to 7.0% from 6.8%, the other details were favorable. Rather than lose a net 5k jobs as the consensus expected, 12k jobs were grown. The details are even better, with 54.4k full-time positions created. There was a loss of 42.4k part-time jobs. The rise in unemployment reflected a rise in the participation rate to 65.9% from 65.7%.

There was a dramatic knee-jerk reaction in both directions for the US dollar. The euro rose to almost $1.1190 before falling to $1.1090. The dollar fell to JPY118.60 and quickly recovered to JPY119.60. Sterling rose to about $1.5275. It then sold off to $1.5210. The Canadian data was not sufficient to protect it from the selling pressure on the dollar bloc currencies that have taken the Aussie and Kiwi to new lows.

On balance, even if the precise timing of the Fed’s lift-off is elusive, the divergence theme remains intact after the US employment report. Talk of QE4 in the US and/or a recession remains wide of the mark. The ECB has signaled its willingness to do more, and the BOJ may downgrade its economic assessment shortly. The dollar bull market, which saw the Fed’s real broad trade-weighted index make new cyclical highs in August, continues.