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James Hyerczyk
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Increased volume and volatility returned to the financial markets on Friday with the release of the February U.S. Non-Farm Payrolls report. The headline number showed employers added 235,000 jobs last month, beating expectations of 200,000. The unemployment rate inched lower to 4.7%, in line with expectations.

The report was deemed solid, but disappointing because it showed wages rose less than expected. This news dampened expectations for a series of interest rate hikes this year by the Federal Reserve. However, the mix of numbers was not disappointing enough to derail the widely expected interest rate hike by the central bank at its March 14 – 15 Federal Open Market Committee meeting.

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At the end of the day, Fed fund futures prices showed investors see a 93 percent chance of an increase in the U.S. benchmark interest rate next week.

Daily June U.S. Dollar Index

Forex

Traders responded to the jobs report by selling the U.S. Dollar. It essentially became a “buy the rumor, sell the fact” situation. Over the last couple of weeks, investors had driven the dollar higher in anticipation of a rate hike in March, but may have overdone the rally because of growing speculation that the Fed was preparing for multiple rate hikes throughout the year.

In other words, the dollar probably would have posted a higher close if not for the sky-high expectations for more aggressive rate hikes. The weaker-than-expected wage number overshadowed the strong headline number, tempering expectations for the Fed to raise rates at a faster pace this year.

In other Forex news, the EUR/USD spiked to a three-week high on Friday after a report that the European Central Bank had discussed the possibility of raising interest rates before the end of its quantitative easing program.

Reuters reported the story, but others said the discussion was brief, and there was not broad support for the idea. It suggested to some that the ECB was just discussing various ways to end its program of Quantitative Easing.

Weekly June U.S. Dollar Index
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U.S. Treasurys

U.S. government debt instruments “whip-sawed” after the release of the jobs report. This was a typical response to a report with multiple layers of data. Treasury yields rose on the headline number, but fell as investors reacted to the average hourly earnings results.

The price action in the 30-Year Bond and the 10-Year Note markets suggest the Fed will raise rates next week, however, the chances for a June rate hike have been reduced, but not completely eliminated. This means the focus for the Fed and investors between now and the June meeting will be on wage inflation.

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