US labor market - another tricky report

The most anticipated macroeconomic report on the forex leaves investors scratching their heads – again. After a puzzling reading for December, when a substantial drop in the unemployment rate (by 0,4% pp) was paired with mixed-at-best gain in employment, in January we saw another similar drop in the rate (this time to 9,0%, by the way at that pace the labor market would be back at the pre-crisis full-speed mode around the autumn) this time paired with even harder nastier +36k rise in employment.

How to match those two together? First of all, the figures come from separate surveys – each with a substantial margin error. That means that some short term divergences between those reports may occur. With an extremely severe winter in the US, there is a reason to believe those differences could have occurred. Delayed hiring process is one of the reasons a reported rise in employment was so lackluster. Secondly, the establishment report (employment data) is slow to catch up with new businesses and if the case is that small companies lead in hiring, households survey (on unemployment rate) may be more accurate.

The market cautiously hopes the unemployment rate is closer to the truth and thus the rise in US yields and some moderate appreciation of the dollar.

TNOTE – yields clearly up

The US yields were on the rise even before the payrolls release on Friday, helped by strong ADP and strong ISMs. That has important implications for the technical picture of the 10Y US benchmark (TNOTE on the XTB platform). The price of the bond left a large flag formation ending a corrective movement and initiating a strong impulse wave. It broke all supports with the key one at the top of the flag and unless the market reverses sharply, further declines in price (=rise in yields) are very likely.

EURUSD – bulls try to defend 1,3540

Even though the EURUSD was mainly about the euro as of late, a rise in US yields helped the bears gaining momentum last week. The euro was down in the second half of last week as it became apparent the ECB wasn’t about to match too elevated expectations regarding tightening in the euro zone. A significant rise in US yields could add some fuel to the declines.

Technically, the pair defended a support at 1,3540 and thus a rebound today. However, buyers would only regain advantage should the pair return to the upward channel – a distant perspective. A move below the key support of 1,3540 would open a path towards 1,3240.   

Events to watch – Bernanke, BoE in the spotlight this week

The calendar for this week looks much calmer in comparison to the previous week. Monday’s releases including euro zone’s sentix (4.30 ET, 10.30 CET, consensus 14 pts.) and German industrial orders (6.00 ET, 12.00 CET, consensus -1,5% m/m) are of secondary importance at best. Second part of the week might be more intriguing with BB’s speech on Wednesday, BoE decision on Thursday, China back from the holidays and the US Treasury placing 3, 10 and 30Y bonds.

Przemysław Kwiecień PhD, Chief Economist

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