The bar was set high for today’s jobs number and unfortunately investors were sorely disappointed.  Non-farm payrolls rose a mere 103k in the month of December, sending the dollar sharply lower.  

The dollar appreciated significantly this past week and the softer NFP report could push some traders to take profits on their long dollar positions ahead of next week’s retail sales reports.  With the consensus forecast at 150k and the whisper number ranging from 300k to 500k, only a handful of traders expected such weak job growth.  However, the dollar’s decline was tempered by a drop in the unemployment rate to 9.4 percent, the lowest level since July 2009.  If you are wondering how the unemployment rate can fall so much when job growth is so weak, the answer is that the workforce shrank, weather issues affected jobs and the household survey tends to be more volatile than the non-farm payrolls report because of its smaller sample size.  Private sector payrolls also fell short of expectations, rising by only 113k compared to a forecast of 178k and upward revisions to the November report was insufficient to make up for the gap in expectations.  Average hourly earnings grew at a slower than anticipated pace last month while average weekly hours held steady at 34.3. 

Throughout the past year, the missing ingredients in the U.S. recovery were jobs.  As the U.S. economy stabilized, American companies stopped laying off workers but the main problem is that there has been little hiring. Before the Federal Reserve can even consider raising interest rates, the unemployment rate needs to fall below 9 percent and even with today’s decline we are long ways from that.  The sharp decline in the unemployment rate is also a bit suspicious and we would not be surprised if it increased once again in the coming months.  Nonetheless, today’s jobs report still indicates that the labor market is moving in the right direction.  U.S. companies are slowly hiring and the hope is that this pace will gain momentum throughout the year.

Bernanke is scheduled to testify on the economy and monetary policy at 9:30am NY Time.  He will most likely err on the side of caution, acknowledging the drop in the unemployment rate but remaining cautious about the overall outlook for the U.S. labor market.  If the NFP number was strong and the unemployment rate declined, Bernanke would have been more optimistic but given conflicting reports, the smartest choice is for him to sound cautious and wait for next month’s numbers for more clarity.

Life after non-farm payrolls may not be so bright if the reports from retailers are accurate.  The holiday shopping season was supposed to be very strong but approximately half of the retailers reporting yesterday missed expectations.   This does not bode well for the New Year especially with the profit margins of retailers being squeezed by higher commodity prices. There are still too many uncertainties out there to convince the Fed to tighten before the end of the year and the prospect of weaker retail sales next week could cause the dollar to give back its gains as investors take profits. In the December FOMC minutes, the central bank reminded us that their dual mandate is maximum employment and price stability. Maximum employment is a very high bar that will take a long time to meet and so he Federal Reserve is still very far away from normalizing, let alone tightening monetary policy.