Poor US Jobs Report Sends Dollar Reeling

The US March employment report makes for dismal reading.  Job growth collapsed to 126k, the least monthly total since December 2013. Adding insult to injury, there was a 69k downward revision to this year's job growth. The average work week slipped 0.1%, which may not sound like much suggests a significant drag on output.  

One of the few bright spots in this otherwise poor report was the 0.3% rise in hourly earnings. Yet, the 2.1% year-over-year pace is still disappointing relative to past cycles.  The participation rate eased back to 62.7%.  The unemployment rate was flat at 5.5%, but the underemployment rate slipped to 10.9% from 11.0%.  

While the jobs report was disappointing, in some ways it confirms what we already know.  The US economy slowed markedly in Q1 15.  The slowdown does not appear to be as pronounced at Q1 14, when the economy contracted by 2.1% at an annualized pace.   In some ways, though investors are faced with a similar decision.  Is the weakness in Q1 GDP indicative of the trajectory of the US economy or is it a function of transitory factors?  

As we argued last year, so too now, that US economy is not slipping back into a recession.  The poor weather, poor strikes and payback from the more than 4% annual pace of consumption growth in Q4 14.  There has been a notable gap between the labor market and GDP.  In the bigger picture, we expect the gap to be reduced by increased growth rather than deterioration in the labor market. 

The pendulum of market expectations had already pushed the Fed's lift off into Q4.  It is possible that it is pushed into 2016.  However, we suspect that while Fed official s will take note of today's report, short-term market participants are likely to put more stock into the high frequency data than the central bank.  The speculative community remains very long US dollars, and position squaring will see the Q1 trend consolidate and correct here at the start of Q2.