Daily Comment (February 3, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] It’s employment Friday!  We have a plethora of charts below but, in short, the report was rather mixed.  The payroll survey was surprisingly robust, rising 227k compared to expectations of +180k.  Wages were soft, with yearly average earnings rising 2.5%, less than the 2.7% rise expected and the 2.8% rise reported last month.  The household survey, on the other hand, was a bit of a dud.  The unemployment rate rose to 4.8%, up 0.1%, which was weaker than expected.  The rate rose because the labor force rose 76k while employment actually fell 30k.  Meanwhile, the participation rate rose to 62.9% from 62.7% and the employment/population ratio rose to 59.9% from 59.7%.  We do note that the BLS made benchmark revisions to the payroll survey and has made population adjustments which will affect the household survey going forward.  The revisions to payrolls increased hiring by 408k since 2012; although a big number in total, it’s only about 9k jobs per month.

The market’s initial reaction is that this report will slow the pace of monetary tightening.  We are seeing the dollar ease while equities and Treasuries are rising.  Still, with the revisions, this report is difficult to analyze and may simply be a “one-off.”  After all, it seems unusual that we would see such strong payroll data with falling wage growth.  For details, see below.

The BOJ and the markets had a showdown overnight as the 10-year JGB yield rose to 0.115%, above the central bank’s target of zero.  The general expectation is that the BOJ is targeting a range of -0.1% to +0.1%, so the rate had increased above the target.  Traders then waited…and waited for the BOJ to enter the market.  During the time of usual morning operations, the bank bought ¥452.4 bn of bonds; participants held this was too small and the yield jumped to 0.15%.  In the afternoon, the BOJ bought an additional ¥723.9 bn.  The JPY weakened and yields fell toward the upper end of the target range.  Although the stated purpose of the BOJ’s yield curve management is to lift growth and inflation, the forex markets are making the maintenance of a zero rate a key element to pricing the currency.  Essentially, if the BOJ doesn’t prove that it is willing to expand its balance sheet without limit to maintain a near-zero 10-year JGB, it appears traders will purchase JPY and lead to a stronger currency.

In a similar vein, two members of the ECB’s executive board, Benoit Coeure and Peter Praet, suggested that the central bank is not concerned about the recent rise in inflation because it is caused by rising oil prices.  Since the rise in oil prices is due to OPEC action and not demand, the bank should not end its accommodative policy because the lift in inflation is probably temporary.  Although this is the official reason, we suspect the ECB is worried about a stronger EUR and wants to counteract jawboning coming from the Trump administration that is designed to strengthen the Eurozone currency.

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