The USD continues to come under fire from slower growth concerns after a month of disappointing data. Even the last nonfarm payrolls (NFP) report that beat expectations did not help the dollar as the wage growth component showed a contraction of 1.7%. The new reality stated by the Federal Reserve is putting an emphasis on all components of the NFP report. An impressive number of new jobs and a reduction on the unemployment rate are not enough. The U.S. has published a string of underperforming indicators this year: USD advanced gross domestic product (GDP) at 2.6%, retail sales, -0.9%, lower purchasing managers’ indexes, and a growing trade balance deficit (-46.6 billion). The ADP private payrolls report showed an addition of 213,000 jobs in January, also missing expectations of 235,000.
The Greek debt talks took a turn for the worse this week. The European Central Bank (ECB) announced after hours that it would no longer accept Greek sovereign debt as collateral. The rhetorical offensive by the newly elected government in Athens was taken aback. Greek officials thought they were making inroads with sympathetic eurozone members. The ECB will offer emergency loans to Greek banks to keep them afloat but at a higher cost. Greek Finance Minister Yanis Varoufakis didn’t hide his thoughts on the ECB’s decision: he called it blackmail.
American Economy Needs a Strong NFP
Economists forecast American employers added 237,000 jobs in January and the unemployment rate dipped to 5.5% from 5.6% in the previous month. The forecast has been adjusted after December’s 252,000 reading also missed expectations. The November report stands as the anomaly with an even higher revision up to 353,000. Job creation averaged 246,000 in 2014 and 289,000 in the final three months of the year. The strong November report put in a significant contribution to that average.
The big question facing the market is if the NFP can break the slower growth trend facing the U.S. economy? JP Morgan downgraded its U.S. GDP growth forecast for the first quarter after a higher trade deficit. The U.S. trade deficit in December widened sharply as a stronger USD appeared to boost imports and reduce exports, which could see the fourth-quarter economic growth estimates revised lower as more data becomes available.
It’s in the Numbers
The Fed has adopted a patient tone. The central bank has some hawkish and dovish members sitting at the extremes but they are in the minority. The majority of the Federal Open Market Committee’s voting members are moderates. They are awaiting more economic signals before deciding on whether or not tighter monetary policy is required. Patience is a virtue and a luxury that the Fed has earned on the back of strong U.S. growth. A slowdown would further compromise the Fed on its patient stance. This is why a strong NFP in all components is needed to reassure the market that the effects were transitory and the U.S. continues to be the only growth oasis in the desert. A strong NFP could trigger a rate hike earlier despite macro headwinds (Europe, Japan, and China). A lower-than-expected NFP could further depreciate the USD, and add more time to the first interest rate hike from the Fed.