Non-Farm Payrolls in the month of December shocked the financial markets by increasing only 18k, which is almost as bearish as negative job growth because the last time we saw levels worse than this was in August 2003 when the US economy shed 42k jobs. The US dollar fell 100 pips against the Japanese Yen in a blink of an eye and rallied by almost the same amount against the Euro.
This clearly indicates that the labor market is deteriorating which could force a heavier hand by the Federal Reserve at the end of this month. More sectors also reported job losses than job growth with the biggest contraction seen in manufacturing, construction, retail trade, information and financial sectors. The unemployment rate also increased from 4.7 to 5 percent, a 2 year high.
The big question now is will the US economy fall into a recession. Today’s labor market report certainly provides a good argument for that. Yesterday, the futures market was pricing in a 34 percent chance for a 50bp rate cut. On the heels of the NFP report, those odds have increased to 54 percent. As much as inflation rising oil prices keeps inflation a problem, the Fed will have to do all it takes to restore stability in the US economy if they want to prevent a recession. Even though average hourly earnings were stronger than expected, it remained unchanged compared to the prior month while the annualized pace of earnings growth slowed from 3.8 to 3.7 percent.
We expect dollar weakness to continue.
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By Kathy Lien, Chief Strategist of DailyFX.com