NFP Reaction: Stocks pare gains and dollar mixed following stumbling labor report

The labor market recovery hit a brick wall in December as the winter virus surge continues to weigh on businesses.  The negative December nonfarm payroll report was expected as COVID lockdowns pummeled 498,000 leisure and hospitality jobs.  Investors are shrugging off this disappointing NFP report as the implications incrementally boosts expectations for more fiscal stimulus.  US stocks held onto its earlier gains as the rising prospects of more stimulus will accelerate the growth outlook. 

The US economy lost 140,000 jobs in December, which was much worse than the consensus estimate for a gain of 50,000 jobs, but within the range of forecasts.  Anyone doubting the economy needs more help can look at total payrolls, which is around 9 million less than pre-COVID levels.  Even with the Biden administration working in sync with the Fed, the economy still has a long way to go.

While the headline of a negative print is disturbing, the positive revisions +135K over the past two months took away some of the pain. 

FX

After bearish dollar bets nearly rose to a decade high, excessive positioning warrants a strong rebound for the greenback.  The playbook of terrible US data bolstering stimulus expectations is being tweaked now that we will have a Biden administration.  Biden’s aggressive approach to provide support for the economy means worse-than-expected economic data might not move the needle as much as it used to.  The consensus trade on Wall Street is for significant dollar weakness, it just needs a decent pullback before leveraged-and real-money managers can ramp up their shorts.    

The dollar softened after the employment report signaled arguments could be made for the Biden administration to provide even more support. 

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