Breaking: US Non-farm Payrolls rise by 199K in December versus 400K median forecast

• NFP rose by 199K in December, below the 400K expected. 
• The unemployment rate fell to 3.9% and Average Hourly Earings rose 0.6% MoM. 
• The dollar has seen a choppy reaction even though the report boosted money market pricing for a March Fed hike. 

Nonfarm Payrolls (NFP) rose by 199K in December versus the median forecast for a 400K rise (some newswires had reported the median forecast at 447K), data published by the US Bureau of Labor Statistics showed on Friday. That meant the pace of job gains was roughly in line with November, when 249K jobs (revised up from 210K) were added to the US economy. Private employment rose by 211K, below expectations for a 365K rise and below last month's 279K rise (which was revised up from 235K). Manufacturing employment rose 26K, below expectations for a 35K rise and down from November's 35K gain (which was revised up from 31K). Government payrolls fell 12K. 

The unemployment rate fell to 3.9% from 4.2% in November, versus expectations for a drop to 4.1% and continued to close in on its pre-pandemic levels of 3.5% in December. The U6 underemployment rate fell to 7.3% from November's 7.7% (which was revised lower from 7.8%), only slightly above its pre-pandemic level of 7.0%. The participation rate rose to 61.9% from 61.8% and the employment-population ratio rose to 59.5% from 59.2%, still well below its pre-pandemic level at 61.1%. 

Meanwhile, the MoM gain in Average Hourly Earnings came in at 0.6%, above expectations for it to rise to 0.4% from November's 0.4% MoM level (which was revised up from 0.3%). That meant that the YoY rate of Average Hourly Earnings growth came in at 4.7% in December versus median forecasts for a fall to 4.2% from 5.1% (revised up from 4.8%). 

Market Reaction

The dollar has seen a choppy reaction to the latest jobs report. It initially saw downside, likely due to the headline number missing expectations. The DXY dipped as low as 96.05 but has since been choppy in the 96.10-20 area in tandem with the money market-implied probability of the Fed hiking interest rates in March rising to 90% from 80% prior to the data. 

Yes, the job gains seen in December were weaker than expected. But measures of economic slack, such as the unemployment rate, the U6 underemployment rate and the participation rate all showed further improvement. Wage gains were also stronger than expected. The Fed minutes of the December meeting suggested that most members view the economy as very close to or having already reached "short-term" full employment. That is to say, with the ongoing pandemic holding workers back from re-entering the workforce, the available labour supply seems to be at or close to full utilisation.

Friday's labour report likely then fulfills the criteria set out by the Fed in the minutes that rate hikes might soon be appropriate so long as the labour market continues to make rapid progress towards full employment. USD bulls will wonder whether this can reignite some upside in the buck.