In November, the US economy added 263,000 jobs vs. 200,000 expected and the Unemployment Rate remained at 3.7%.
A higher-than-expected week for U.S. employment may indicate that the decline in inflation is not strong enough. Accordingly, the Fed’s decision to soften its key rate hike may now be in doubt. After all, the Fed was expecting a lower NFP figure.
How did markets react?
The publication of the US NFP results caused a very strong reaction among traders and investors. After all, the published data turned out to be much higher than forecasts.
As a result, the US Dollar Index has surged after hitting a 6-month low this morning.
XAU/USD
At the same time, assets such as $GBP/USD, $EUR/USD, and $XAU/USD have begun to decline. In particular, Gold price turned south and dropped below $1,790 in the early American session.
The benchmark 10-year US Treasury bond yield is up more than 2% on the day near 3.6%, weighing heavily on $XAU/USD.
GBP/USD
The US stock market greeted the news mixed. The major indices have not yet set the tone for a decline, although the Dow Jones ($DOW30) and SPX500 ($SPX500) have lost slightly since the release.
Why does NFP affect the markets?
NFP tracks the number of job creations in the US, excluding farmworkers primarily due to the seasonal nature of their jobs. The NFP aims to provide an insight into the employment situation that is better gauged by only including permanent job hires.
Today’s NFP results are the golden mean, not too hot, nor too cold. It is slow enough to keep the Fed at a 50 bps hike in December while refraining from being too depressing to hit stocks and trigger safe-haven flows.
The November NFP data surprised to the upside for the 7th time in a row and the October figure was revised higher, stressing that the US labor market continues to show signs of great resilience despite tightening financial conditions.
So, the impressive NFP data threatens to end the recent USD selloff and delay the opinion that there has been a fundamental, dovish shift within the Fed.
Summary
Generally, there is a direct correlation between NFP results and the US dollar as well as other assets:
- A better-than-expected NFP → stronger economy → stronger USD
- A worse-than-expected NFP → weaker economy → weaker USD
Today’s market reaction confirms this. Also, assets like Gold and Euro that trade inversely to the US Dollar, tend to decline if NFP is better than expected, and vice versa. This is because the raging labor market could trigger even more inflation, which investors fear.
Please consider this in your trading strategies and be careful when volatility is high 📊
