Why strong US jobs growth sparked a market sell-off

The hotter-than-expected labour report has cooled recession fears but markets are concerned about the effect it will have on inflation

Hiring unexpectedly surged and unemployment fell to a 53-year low in the US labour market in January. AFP

Risky assets opened the week on the back foot, continuing Friday’s sell-off after the latest US non-farm payrolls report.

Data from Friday showed that the US economy added 517,000 jobs in January, dwarfing Wall Street’s expectations of 185,000.

The overall unemployment rate fell to 3.4 per cent, which represents more than 50-year lows.

The news shook higher-yielding assets, as stocks, currencies and gold were sold off against the US dollar.

While the hotter-than-expected jobs report certainly cools recessionary fears, it is the effect of these job gains on inflation that bothers markets.

Continuous job growth will yield unwanted price pressures, which ultimately will make the US Federal Reserve maintain a hawkish stance towards future rates — and inevitably benefit dollar bulls.

A closer look at the numbers and you could say that markets may have become slightly carried away.

A large chunk of the 517,000 jobs created came from leisure and hospitality and represented a majority of gains in part-time jobs (full-time jobs lost in January).

This would denote that the report does not suggest such a strong US labour market — another indicator of this has been the large layoffs in the tech sector, highlighted by Google, where more than 12,000 employees were laid off in January.

While the move following Friday’s announcement might be premature, all attention will now focus on coming US data points, particularly around inflation, to gauge what the Fed’s intentions will be.

Preceding the non-farm payrolls report on Friday was the Federal Open Market Committee rate decision.

As widely expected, the Fed increased rates by 0.25 per cent at its meeting last Wednesday. This was a non-event and markets instead focused on the Fed rhetoric for clues on coming policy.

The post-meeting statement said that US inflation “has eased somewhat but remains elevated” and “while recent developments are encouraging, the Fed will need substantially more evidence to be confident that inflation is on a sustained downwards path”.

Initially, markets weakened on the comments, but when Fed chairman Jerome Powell said that “the disinflationary process” has started, this brought optimism, with the dollar selling off on the news.

Judging by the price action following Wednesday’s announcement, it remains unclear who is dictating policy at the moment — is the Fed steering the market or vice versa?

In the medium term, the underlying numbers do not support a softer landing for the US economy — and we are not out of the recessionary woods yet.

We need to continue to see how US data pans out to gauge short-term trends.

Through February, the US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, should find upwards resistance in the channel between 104.80 and 105.20, while support kicks in at 101 levels in the month ahead.

The recent reversal in the US dollar over the past few trading sessions has halted the greenback's slide since the start of 2023.

This has put some short-term pressure on the euro against the dollar. The EUR/USD currency pair have gone through a bit of a renaissance since the start of the fourth quarter — a period in which EUR/USD has appreciated more than 11 per cent.

While the run above 1.10 ran out of steam, the underlying fundamentals for the euro area will keep long positions interested.

Technically, I expect EUR/USD to find strong support at 1.05 levels through March, while the level of 1.10 will cap any upside move.

Finally, it’s been lively in gold markets. After peaking at $1,959 levels this month, gold finds itself consolidating at $1,870 levels at the time of writing.

Given the uncertainty of future Fed action, expect the precious metal's price to remain volatile in the weeks ahead.

I expect support to kick in at between $1,796 and $1,812 throughout February, while upsides will be capped at $1,980 in the month ahead.

Looking ahead, the big release in February will be the US January inflation data, due on February 14 at 5.30pm UAE time.

Year-on-year consumer price inflation is expected to come in at 6.5 per cent.

Any beat on this number should see the dollar continuing to build on its recent gains, while even the slightest drop in this print will spark another mini rally in markets.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers