Friday, April 4, 2014

Do Non-Farm Data Matter?

The market is bracing for US non-farm payrolls to be 200,000 or stronger in February compared with 175,000 in January. The employment sub-index for the Institute for Supply Management (ISM) non-manufacturing purchasing managers’ index bounced to 53.6 in February from 47.5 the previous month. The last time non-farm payrolls surprised strongly was back in January 2012, when it surged to 360,000 from 196,000 in December 2011. Interestingly, the same ISM employment sub-index also bounced to 54.9 from 49.0 for the same period.

That said, economic and market conditions were very different back then. The Eurozone crisis that started in the fall of 2011 led the US ten-year bond yield to fall from 3.00% to 2.00%, where it stayed. The stronger non-farm payrolls had no impact to push yields higher because the Eurozone recession spilled over into the global economy. The US dollar was a safe haven during this period. The Federal Reserve eventually started quantitative easing in September 2012 in spite of improving stock and property markets.

In May-September last year, the US ten-year bond yield rose back from 1.60% to 3.00% on the Fed paving the way to unwind its asset purchase programme. The Eurozone was also exiting its recession then. The US ten-year bond yield has consolidated within a 2.60%-3.00% range since, in spite of three tapers in December, January and March.

With US inflation around 1% and below its target, and the Fed signalling rate hikes in the second half of 2015, it remains doubtful if stronger non-farm payrolls will have any lasting impact other than a knee-jerk reaction. The same can probably be said for the US dollar. The DXY (US dollar) index has been consolidating mostly within a tight 80-81 range with occasional periods of testing above and below its limits.