US Data Brings Uncertainty for the USD Path

The US dollar stabilized overnight following a volatile Friday session. Personally, I observed that it initially strengthened post the release of a robust non-farm payrolls report but later relinquished those gains due to a weaker-than-expected ISM services survey later in the day. As the dust settled, the dollar index returned to Thursday's trading levels pre-economic data releases on Friday.

In my analysis, the initial Friday strength stemmed from the revelation that the US economy added 216k jobs in December, although the positive news was tempered by downward revisions to prior months' gains totalling -71k. Excluding government sector gains, the slowdown in private sector job growth persisted, averaging 134k/month in the second half of the previous year compared to 204k/month in the first half.

Even more striking is the slowdown in more cyclically sensitive jobs, excluding government, healthcare, and education sectors. Payrolls increased by a mere 40k/month in the second half of the last year compared to 122k/month in the first half. Despite a stronger December employment report, these underlying trends indicate weakening labour demand, aligning more with supply and easing upside inflation risks, in my perspective.

However, the household survey offered a less reassuring signal for labour supply. It indicated a sharp 0.3ppt drop in the participation rate to 62.5%, coupled with a decline of -676k in the labour force and -683k in employment, the largest monthly drop since the early 2020 COVID shock. Considering the volatility of the household survey, I'm cautious not to overemphasize these December moves unless repeated in the coming months.

I personally noted a 0.4% M/M increase in average hourly earnings growth for the second consecutive month, highlighting ongoing concerns for the Fed regarding upside inflation risks from a tight labour market. While the overall report may not alone prompt the Fed to meet market expectations for an imminent rate cut in March, the US rate market has scaled back those expectations, currently pricing in around -17bps of cuts.

In my perspective, the initial strengthening of the US dollar due to reduced Fed rate cut expectations was short-lived, reversing swiftly after the ISM services survey in December raised concerns about labour demand. The employment sub-component dropping sharply by 7.4 points to 43.3 in December, the largest since the 1H 2020 COVID shock, challenged expectations for a soft landing for the US economy. This sudden adjustment, along with recent declines in other labour market readings like the JOLTS hiring rate, suggests a potential marked slowdown in labour demand, ensuring increased attention to labour market data in the coming months.

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