US Non Farm Payrolls blast past expectations to lift stocks

US non-farm payrolls blasted past market expectations in January, with non-farm payrolls increasing from 203,000 to 243,000 when a drop had been expected, giving stocks a strong lift.

Private payrolls also beat expectations to grow to 257,000 against expectations of 170,000 whilst the US unemployment rate continued to fall to 8.3% from a previous level of 8.5%, when a small increase had been anticipated.

This is a really stellar set of numbers and has surprised many who had expected a slowing of jobs growth after the December holiday period. Not many had predicted US jobs to be this strong at this stage and the market reaction was quick and bullish, with the FTSE 100 rallying an immediate 1% to hit new highs above 5860.

The jobs figures paint quite a different picture to the tone of voice used by the Federal Reserve last week, who applied a somewhat dovish tone towards US growth expectations. This naturally poses the question what are the Fed seeing further down the path that the market isn’t right now? And what’s more, a stronger than expected labour market goes directly against the rational to increase asset purchases through quantitative easing, and this may pose a somewhat negative impact in the medium term for those investors that had factored this into their trading.

Regardless of this, investor appetite for risk has firmly increased on the back of these numbers. We saw investors buy firmly into financial stocks as a direct consequence, lifting the FTSE 350 banking sector by 2.5%. The FTSE 100 has now firmly broken through resistance at 5800 and traders have 6000 firmly now in their sights.

Non-Farm Payrolls growth expected to slow in January (Previous update)

02/02/2012 (1.45pm) Joshua Raymond, Chief Market Strategist, City Index 

Friday sees the traditional first Friday of every month release of US jobs data, including non-farm and private payrolls, alongside the US unemployment rate.

Current expectations are for the rate of US jobs growth to recede somewhat from a surprisingly strong December labour market. December’s labour force was always expected to gain strength as businesses catered for the likely increase in consumer activity over the holiday period. The strength of December’s jobs increase is now expected to see a slowing of hiring in the US last month as businesses scale back somewhat.

Consensus:

Expectations:

Each of the three critical measures of US jobs data in December vastly surpassed market expectations and gave stocks strong support. But it could be somewhat premature to start believing that US growth will quicken in pace and monthly non-farm payrolls could maintain a growth of circa 200,000 consistently in the first half of 2012. Indeed, much of the strength of December’s jobs market was correlated to a 42,000 spike in the hiring of couriers and this likely exacerbated the measurement somewhat and on a temporary nature. January’s reading is expected to show the rate of jobs growth declining as a result.

Add to the mixed US economic data the fact that the language from the Federal Reserve recently turned much more dovish, indicating some degree of hesitation that US growth is far from locked in on its current trajectory path. The Fed even went so far as to pledge to maintain interest rates at exceptionally low levels through to 2014 and hinted that more quantitative easing remains in their arsenal of supportive weapons to stimulate US growth. The Fed’s dovish stance may keep US economic data somewhat volatile going forward as a result.

So the dots are connecting relatively clearly for a slowdown in jobs creation for Friday’s reading.

Despite this, the market reaction to the data could well be a tale of two stories, depending on the long term nature of which traders focus on. A better than expected growth in jobs could help to convince the strength of the US economic recovery and potentially lift stocks as investor appetite for risk gains (see chart below).

However a stronger US economic recovery pushes the prospect of more QE further aside, posing a somewhat negative caveat to the data. Any potential losses that may be triggered from a data disappointment could be curbed by higher hopes that slowing job creation could trigger the Fed into QE3 action.

Traders in UK and US stocks, alongside currencies, need to be on guard for some added price volatility as traders position themselves in the run up to the jobs release, whilst the immediate aftermath of the release historically can create wide price swings.