Generally Good News for US Economy, but USD May Still Weaken

The 162k rise in March non-farm payrolls was a little below expectations but the Feb series was revised to a loss of 14k rather than a loss of 36k. The unemployment rate was steady at 9.7%. 

The private sector added 123k jobs and this was a bit better than expected. Feb's initial 18k loss was revised to +8k. The average private sector job growth then over the first two months of the year was 65.5k. Given the decline in weekly initial jobless claims, this is may be close to the underlying trend.

One disappointing aspect of the report was news that hourly earnings fell 0.1% and this is only partially offset by the revision to Feb's report to +0.2% instead of 0.1%. That said, the impact on consumption may be mitigated by the fact that more people were working and for a longer work week as the weekly hours rose to 34 from a upwardly revised 33.9 (initially 33.8).

The manufacturing sector added 17k jobs and Feb was revised to 6k from 1k. This bodes well for industrial output and a bit higher capacity utilization rate in industry. A pleasant upside surprise was that the construction sector added 15k jobs. It had shed 59k jobs in Feb. However, this is probably the clearest evidence of the weather impact rather than a turn around in nonresidential construction where weakness is likely to persist. This means that construction spending may not have risen as much as jobs figures may suggest.

The service sector added 121k jobs after a 33k increase in Feb. This includes the fact that financial firms continue to shed workers (-21k after -15k in Feb). Temporary workers increased by 40k. 

The dollar extended its gains and the S&P futures ticked up, while the bond market slipped lower. As is well appreciated, market conditions are thin. As noted earlier, it may take a break of $1.35 in the euro to indicate its upside correction is over. Sterling has slipped and appears headed for the congestion area seen yesterday $1.5180-$1.5200. Dollar has been bid to new highs against the yen and is looking for JPY95.00. 

To the extent that the jobs data reflects continued improvement in the US labor market it fits into our general view that the output gap in the US is closing, albeit slowly, and that this will allow the Fed to raise interest rates before the BOJ, ECB and BOE. We expect this to underpin the dollar on a medium term perspective. What we, and the market are wrestling with, is the magnitude and duration of this correction.