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Dollar mixed after strong jobs gain as wage growth disappoints

The US economy added 242k jobs in February according to the latest non-farm payrolls reports, beating consensus estimates of 195k jobs. Adding to the strong data was an upward revision to January’s figure, which was revised from 151k to 172k jobs.

The dollar initially spiked up 0.3% to 114.21 yen after the data and the euro fell 0.6% to 1.0902 dollars as it cemented expectations that the Federal Reserve will stick with its policy of gradual increases to the fed funds rate. However, looking at the jobs report more closely, there was unexpected weakness in wage growth, which cast doubt over the timing of the next hike, pulling the dollar lower soon after the release. Weak earnings growth is seen as giving the Fed additional breathing space as to how quickly rates can go up and diminishes any chances of a March increase.

Average hourly earnings declined by 0.1% month-on-month in February, against expectations that they would grow by 0.2%. It represents a slowdown in the annual rate from 2.5% to 2.2%. February’s decline was the first month-on-month drop since December 2014 and follows a strong rise of 0.5% the prior month. Wage growth has failed to keep pace with robust jobs growth over the past two years.

Other components of the jobs report however, suggest the labor market continues to improve. The private sector created 230k jobs last month, while the government sector added 12k jobs. The manufacturing sector was an exception though as it reversed some of January’s gains to lose 16k jobs. The unemployment rate was unchanged at 4.9%, in line with estimates.

The labor force participation rate increased to 62.9% in February, the highest since January 2015, extending its reversal of years-long decline since the financial crisis. This is a sign that more people are being pulled back into the labor market as more job opportunities become available.

In a further sign of improving labor conditions, the broader measure of unemployment – the U6 underemployment rate – decreased to 9.7%, the lowest since May 2008. The U6 underemployment rate gives a wider view of the jobs market as it includes people who are in employment but seeking better work.

The dollar fell back to below 114 yen in late European session, while the euro surged above 1.10 dollars. Even the battered pound managed to post gains, climbing above 1.4210 dollars. However, the dollar is likely to regain some direction after the Fed’s policy meeting on March 16-17.

The FOMC is expected to downgrade its dot plot guidance of the fed funds rate in its next meeting but will likely maintain the view that earnings growth should start to eventually pick up as unemployment continues to decline. What investors will be watching more closely from the Fed is the emphasis on the downside risks from the current volatility in financial markets and the resulting tightening of financial conditions.

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