Shockingly Poor US Employment Data

The US employment report was simply terrible. Adding insult to injury, the April data were revised lower as well. The dollar initially firmed, but as participants consider the risks of QE3, the upside momentum stalled.

Non-farm payrolls rose 69k, less than half of what was expected and the April job growth was cut to 77k from 115k initially. The private sector added 82k jobs vs 87k in April. For the first time since 2011, the unemployment rate ticked up (to 8.2% from 8.1%). Hourly earnings edged up, but by only 0.1% and not the 0.2% the consensus forecast. The year-over-year pace of 1.7% is the lowest since Dec 2010. The work week slipped and this is also important in terms of full time equivalent output. Manufacturing added 12k workers, while construction lost 28k. Retail added 2k and the government lost 13k.

The jobs data and revisions would seem to raise the risk of new action by the Federal Reserve as the job growth is stalling. The US 10-year yield is now near 1.45%, a record low. The NY Fed's Dudley earlier this week noted that the risks associated with QE outweighed the likely benefits. It seems extending Operation Twist may be a more realistic possibility. 

The jobs data will set the tone for coming economic reports. Manufacturing output is likely to be weak. Construction spending also will likely be soft. May personal income will also likely be soft (it rose 0.2% in April, which was reported today).

On balance, even if the risks of new Fed action have increased, the critical nature of the European debt crisis and their own poor data suggests that there may be a policy response there first. This, and the generalized risk off still keeps our constructive dollar outlook intact (except against the yen)

There was some market confusion about the possibility of BOJ or Fed intervention, but it still seems unlikely. The market is reacting to new news and this is not the BOJ's modus operandi. However, ti does show how nervous and jittery the market is, especially given that the largest fx center, London, is on holiday Monday and Tuesday. RBA Tuesday. ECB meets Wed. BOE Thursday.