News & Analysis

Today’s data, which saw nonfarm payrolls print at +431k in March despite missing expectations for +490k, was nonetheless a strong showing from the US economy as all previous indicators apart from the ADP employment measure on Wednesday suggested weaker employment growth.

Relative to its historical average, the net employment increase was substantial. Overall, job growth in Q1 averaged 562k per month, the same as the monthly average in Q1 2021 when the labour market was recovering from huge pandemic-related job losses.

Along with March’s net employment increase, today’s report saw employment revised upwards in both January and February by 23k and 72k such that net employment was 504k and 750k in the two respective months.

Taken together, the data saw the unemployment rate drop by 20bp to 3.6% while average hourly earnings rose by 5.6% YoY, the highest reading since June 2020 (note that the June 2020 wage reading was artificially inflated by pandemic distortions as low-wage workers dropped out of the labour force). Today’s data signals increased tightness in the US labour market and shows preliminary signs of wage pressures starting to arise. With this being the last Nonfarm payrolls report before the Fed’s May 4th meeting, it should keep the US central bank firmly on track to hike by 50bp.

Net employment continues to print well above historical averages even as the unemployment rate sits near record lows 

The 431k rise in payrolls was the 15th straight monthly gain, and also the 15th month where the increase in jobs exceeded the average gain seen over the last 30 years.

The rise in employment was primarily driven by net employment increases in leisure and hospitality (+112k), professional and business services (+102k), retail trade (+49k), and manufacturing (+38k). Out of the following industries, employment sits below February 2020 levels in only leisure and hospitality and manufacturing, highlighting the fact that job gains are no longer primarily driven by the Covid recovery.

One slight concern for the Federal Reserve may be the fact that the recovery in the participation rate stalled in March at 62.4% and the fact that the employment-to-population ratio, despite rising by 0.2% to 60.1%, continues to sit below Feb 2020 levels.

Without signs of a structural shift in the labour market brought about by the pandemic, these metrics suggest there may still be signs of hidden slack in the labour market that may appear once wage growth hits elevated levels. This early on in the Fed’s hiking cycle, these concerns are unlikely to warrant caution, especially as wage growth tracks above 5% and headline inflation sits at multi-decade highs.

The market reaction confirms this view, with front-end Treasury yields rising 10bp to sit at recent highs, with the 2-10 section of the yield curve inverting yet again. To us, this suggests that markets are also pivoting to fully price in a 50bp hike by the Fed in May, which now sits at an 88% probability as implied by overnight index swap markets. Despite the inversion of the Treasury curve traditionally forecasting an imminent recession, we don’t believe this is likely and continue to favour the dollar in the near term on higher US rates.

Employment-to-population rate still sits below pre-pandemic levels, suggesting slack still exists in the labour market


Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst


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