Why is the US dollar so solid after a weak jobs report?
The US added just 199K jobs in December, much softer than the 410K consensus and the ADP rate above 800K.
Firstly, the indications in the household survey (rather than the establishment survey) were stronger with unemployment falling to 3.9% from 4.2%. Secondly -- and I think this is the important one -- average hourly earnings rose 0.6% in the month compared to 0.4% expected. That pushed the y/y rate to 4.7%.
In its previous 'transitory' thesis, the Fed expected wage growth to stay relatively cool as the pandemic pushed prices up before supply chains recovered and inflation reverted to 2% or lower. Instead, prices have stayed persistently strong and now workers are discovering negotiating power.
That dynamic could create the feared wage-price spiral, where a higher cost of living leads to workers demanding more pay and then higher pay results in more spending and even higher prices. It's the kind of inflation that central banks truly fear.
Obviously, one month doesn't make a trend but with all the sudden inflationary awareness and higher prices, the market is sensing that the Fed will be more aggressive. That will mean a rate hike in March and could mean even more than the 75 bps of hikes that are priced in. The implied odds of March are now up to 90% from 80% earlier this week.
So the US dollar is holding its ground in the aftermath of the report and if the same fear of rate hikes hits stocks ,we could see trades like AUD/USD weaken.