US nonfarm payrolls surprised well on the upside. Payrolls declined by a much less severe than expected 345,000 last month, the slowest pace of job cuts since September of last year. However, this wae tempered by a worse than- expected rise in the jobless rate. Unemployment rose 0.5% point to 9.4%, up a full 5% points from its trough just over two years ago.
The dollar rallied following the upside surprise in the US jobs report. US Treasury yields spiked 34bps and 12bps in the 2-year and 10-year as the knee jerk market response stoked fears that Fed acommodation may not be as lasting as initially expected. DXY rallied 1.7% on the back of the break higher in nominal yields. EUR/USD slipped below 1.40 while USD/JPY backed above 98. For Asia FX, the initial knee jerk market response was to sell into the USD/Asia NDFs into the payrolls surprise. However, general USD strength promptly moved against the trade and reversed initial moves.
Short-lived USD strength. We expect these knee jerk market moves to be short-lived. Despite the positive payrolls surprise, we do not expect Fed hikes anytime soon and expect monetary stimulus to remain in place for a prolonged period of time stretching out to 2011. The abundance of economic slack and very high jobless rate should keep inflation in check and monetary accomodation in place for some time to come.
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