Derek Halpenny, European Head of GMR at MUFG, notes that the dollar remains broadly weaker today following the mixed US employment report on Friday. Key Quotes “The impressive 242k gain in total nonfarm payrolls took a backseat to the 0.1% m/m drop in hourly earnings and the 0.2 point drop in average weekly hours that allowed investors to conclude that while the labour market continued to improve, there remained limited evidence of a tightening jobs market lifting wage growth. We have long been witnessing a certain degree of disconnect between market expectations of what the FOMC will do this year and what the fundamentals suggest the FOMC needs to do, but Friday’s price action was the clearest example yet that we can think of. The vast bulk of Friday’s information in the jobs report confirmed that the US labour market continues to strengthen. Indeed, the 242k NFP gain plus the 30k upward revision to the two previous months was actually surpassed again by the gain reported in the household survey report. The 530k gain in February followed the 615k gain reported in January. Despite the huge employment gains, the unemployment rate remained unchanged at 4.9% - this was due to the 555k increase in the labour force. As a result, the participation rate jumped from 62.7% to 62.9% while crucially the U6 unemployment rate fell to a new cyclical low of 9.7%. We believe that this is far more important than the surprise 0.1% m/m drop in hourly earnings. Indeed, the average for the U6 unemployment rate from when the series began in 1994 through to the Great Financial Crisis in 2008 is 9.0% - so we are essentially nearly fully reverted to a “normal” U6 level of unemployment. Speaking of the surprise hourly earnings drop, there were market reports of a timing quirk distorting the hourly earnings data when the survey week covers or does not cover certain days or dates in the month. However, Market News reported that the BLS denied there was any timing quirk. Still, suspicions remain given that the flat m/m reading in December was followed by a 0.5% jump in January to then fall back to -0.1% in February. We suspect the following months will eventually result in the upward trend in annual wage growth resuming given that every other piece of information on jobs and wages back up the idea that wage pressures are now beginning to build. So our conclusion of Friday’s jobs report and it’s implication for the dollar is that the report was certainly stronger than you would be led to believe by the performance of the dollar on Friday. Our call for a June FOMC rate hike is still very much in play. Fears of a US recession are very overblown and Friday’s report certainly did not suggest in any way that the US economy is moving toward a recession. The FOMC were never going to be taking action next week and while there are doubts about the hourly earnings data, the FOMC will gladly cite that data as reason for allowing a delay. But the DOTS projection may well only come down modestly (from four to three rate hikes) and that leaves ample scope for a further jump in yields in the US. That would help strengthen the dollar against non-commodity G10 FX.” For more information, read our latest forex news.