The NFP came in higher than analysts expected. This, however, wasn’t a surprise to us given the fact that the recent employment-related data have been so strong. Plus, throughout the last year, the analyst consensus has been much more pessimistic about the health of the jobs market in the US.
But, even though the headline number in this report is much better than expected the average hourly earnings disappointed and the hours worked were softer than before. On top of this, the unemployment rate ticked higher. This indicates there are internal weaknesses in the labour market that are starting to show in this report but not yet in the headline number.
For instance, jobs in the technology industry were lost. This, however, doesn’t show yet in the employment report as it takes 60 to 90 days for them to claim. So the growth in the headline number must have come from hiring in lower-wage jobs. The fact that the earnings were down supported the idea.
Market reactions have been interesting. Bonds rallied sending the yield and the dollar lower and risky assets higher. It seems that the market participants are more focused on earnings data and the recent bank scares with sharp deposit decline in the Silicon Valley Bank. If people start losing their faith in banks then the Fed has to think twice whether it can keep on fighting inflation as higher rates would drive bond prices lower which in return would deepen the losses banks have from holding those bonds.
This could create a spiral in which the Fed would soon have to deal with a banking crisis that could be only solved by loosening monetary conditions. That’d be a classic catch-22 situation where the Fed would be feeding inflation by loosening monetary conditions if they lower the rates but increase the risk of liquidity problems for banks if they keep on fighting the inflation.
Chief Market Analyst
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