USD/JPY gave up the gains from last Friday. Is the USD/JPY going to head south?

US wage growth slowed, suggesting that a more hawkish Fed may not arrive anytime soon 

Last week, we were worrying about a potential trade war and US wage inflation. The outcomes of all the data were perhaps the best we could have hoped for. Global stocks market could extend their stabilization in the next few days.   

US Payrolls rose 313,000 in February, compared to the earlier 205,000 median estimates, and the two prior months were revised higher by 54,000, according to Labour Department figures showed on Friday. The unemployment rate held at 4.1% for the fifth straight months. Average hourly earnings increased 2.6% from a year earlier following a downwardly revised of 2.8% gain. Unemployment rate failed to drop towards 4.0% and slower wage growth suggests inflation growth may still be at the pace as previous months, easing those worries on faster-than-expected Fed’s rate normalization. 

We need to pay attention to the rising labor-force participation which may be a factor holding down wage gains. The participation rate increased to 63%, the highest since September, from 62.7% from the prior month. The 0.3 ppt increase in the labor participation rate is the biggest jump since 2010. This suggests the economy still has room to attract more discouraged workers back to the labor market.  This factor could lead to Fed having a second thought whether fastening the pace of tightening is appropriate at this moment. 

As for the dollar, its recent negative correlation with stocks suggests that it may not move as strong post the report, as the report eased the fears in the stocks market. However, we don’t think dollar’s downside is limited as well due to the steepening yield curve. If the employment data suggested that slack remains in the labor market, why are yields popping a little? Regardless of unemployment rate or wages, 313k in NFP is a big number. Last month, stronger wages left the bond market firmly in the control of overall market direction. With today’s report favoring more of a Goldilocks environment, perhaps this time round the stock market will take the lead. Since stronger job growth and weaker-than-expected wages is positive for equities, the end result should be similar: bond yields can hold up.