U.S. Dollar Spikes Higher after Unemployment Rate Hits Lowest since 1969

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The Dollar spiked higher Friday after official data showed the U.S. unemployment rate declining to a 49-year low while wages continued to grow at a healthy clip in September, denoting a tightening labour market.

The U.S. economy created 134,000 new jobs during September which, although beneath the consensus for 185,000 and down from the 201,000 seen back in August, still pushed the jobless rate to a new cycle low. 

Unemployment fell to 3.7%, down from 2.9% in August and its lowest level since 1969, when markets had looked for a decline to only 3.8%. The participation rate was steady at 62.7% for the month.

Average hourly earnings rose by 0.3% during September, down from the 0.4% previously and in line with expectations, which pushed the annual rate down by 10 basis points to 2.8%. 

"Cumulative upward revisions totalling 87K made up for the shortfall versus the consensus forecast, and the rest of the detail within the report looked solid as well," says Andrew Grantham, an economist at CIBC Capital Markets.

Expectations were high going into the release given Wednesday's ISM non-manufacturing PMI, the jobs component of which has a strong correlation with payrolls growth, revealed a sharp pickup in hiring within the U.S. services sector last month. It turns out the unemployment rate surprised positively despite the disappointment on jobs.

There was increased uncertainty around forecasts for the jobs number this time because of quirks in how the data is calculated and given the recent hurricane could have kept large numbers of workers at home in certain states.

"The hurricane during the month would have impacted today's results (keeping employment lower and wage growth higher than they otherwise would be), but the impact shouldn't have been that big. As such, today's results are still consistent with a strong US economy and gradually accelerating inflationary pressures," Grantham adds.

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The Dollar index was quoted 0.15% higher at 95.91 following the release after extending an earlier 0.04% gain. The Pound-to-Dollar rate was 0.34% higher at 1.3067 while the Euro-to-Dollar rate was 0.05% higher at 1.1522.

Friday's data comes after Federal Reserve (Fed) chairman Jerome Powell told an audience at The Atlantic Festival that U.S. interest rates are still a "long way" off from the so-called neutral level and that its benchmark lending rate could even cross that threshold eventually.

The comments prompted a renewed sell-off in American bond markets, which pushed the 10-year Treasury yield to a seven-year high above 3.2% Thursday, drawing a fresh bid for the U.S. Dollar. Investors must buy the Dollar in order to benefit from the higher rates now on offer in the U.S. bond market.

"Interest rates are still acommodative, but we're gradually moving to a place where they will be neutral," Powell said in discussion with Judy Woodruff of PBS NewsHour. "We may go past neutral, but we're a long way from neutral at this point, probably."

Powell's comments followed behind Septembers ISM non-manufacturing PMI, which measures activity and optimism among U.S. services companies.

The index rose to its highest level since the late 1990's in September as order books swelled and hiring in the sector surged. That further reinforced the analysts' upbeat views of the U.S. economic outlook.

"Yesterday's record 62.4 reading for the ISM employment component would ‘imply' a 500k increase in private sector jobs, which would be the best since 1983," says Kit Juckes, chief FX strategist at Societe Generale, following the report. "The underlying message is that the US economy isn't just in fine fettle, it's on fire."

Judging from the market reaction, investors appear to have taken a new message about rates from Wednesday's events. One that points to interest rates moving higher over coming years than they otherwise might have.

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