US Jobs strong earnings soft USD soars

The US dollar soared further, dragging EURUSD to fresh 11-year lows of $1.0845 on another solid US jobs report supporting the case for a Fed June or September rate hike as US non-farm payrolls powered ahead with a 295K increase in non-farm payrolls in February, overshooting expectations of a 3^rd consecutive decline to 235K. As NFPs posted their 12^th consecutive monthly reading above 200K, the unemployment rate fell to a 7-year low of 5.5% (lowest since May 2008) with help from a renewed drop in the participation rate to 62.8% from 62.9%. The sum of revisions from the December and January NFPs produced a net upside revision of 8K.

On the positive side, inclement weather in the NorthEast did not have any larger than usual negative impact on jobs in February as was highlighted in the 29K increase in construction jobs.

Slowing wage growth keep debate

The only negatives of the report standing the way of a Q2 rate hike are the decline in the average hourly earnings to 0.1% m/m from 0.5% m/m and to 2.0% y/y from 2.2% y/y . The increasingly important pay figures are crucial for the Fed’s timing in determining the first rate hike. Prolonged signs of low inflation and lack of any breakout in the earnings figures mean the doves at the Fed will call for “patience” in the March meeting. Another alternative is to for Yellen to drop the “patience” guidance by reiterating that the modification of the forward guidance should not be read as indicating that the “Committee will necessarily increase the target range in a couple of meetings”.

Stocks shrug NFP, fearing Fed

Today’s divergence between falling stocks and rallying bond yields highlights stock traders’ fear that the Fed will drop “patience” reference from this month’s FOMC statement, thus signalling a rate hike as early as June. The Dow Jones Industrials Average is down 200 pts to 17,940 pts and the S&P500 is also off 1.0% to 2079, approaching its 55-DMA of 2062. 10-year bond yields soared by more than 12 bs to 2.24%, reaching the highest level since December 29 and breaking above the 100-DMA. Yields are 7 bps away from the 200-DMA, which was last broken in March 2014.

US hits debt limit again

Meanwhile, the US Treasury announced suspending the sales of state and local government series of non-marketable securities by end of next week if Congress fails to raise the debt limit. The current debt ceiling is valid until March 15. Lew said only Congress is empowered to increase the nation’s borrowing authority, but the ceiling may not need to be raised until autumn according to the bipartisan Congressional Budget Office. There is enough tax-related revenue coming in for the next few months. Since Republican gained control of the House of Representatives in 2010, Congress has struggled to raise the debt limit, nearly facing default in 2011 and 2013.

Does it make any sense for the Fed to raise interest rates on the US credit card at the same time the Federal government is struggling to raise its debt ceiling?