Waiting For Draghi

The upcoming week will be important for market participants, with both the Bank of Canada and European Central Bank making policy decisions towards the end of the week, while investors continue to decipher the intricacies of the US labour market report that was released last Friday.The non-farm payrolls report from Friday confirmed our view that slack continues to be absorbed in the labour market, though investors looked through the larger than expected headline creation of jobs, and instead focused on the ancillary indicators of average workweek hours and weekly earnings.

The positives in the February report were that the headline number crushed estimates coming in with 242k new jobs added, while January was revised higher to 172k, with the U-6 underemployment measure dropping from 9.9% to 9.7%, while labour force participation increased from 62.7% to 62.9%.The negatives from the report on Friday were that average workweek hours fell 0.2 hours, while average earnings dropped by 0.1%, missing estimates of the 0.2% increase that had been expected.

The optics of the February labour report are almost the exact opposite of the January numbers, though taken together it appears as if the labour market in United States remains stable, with slack continuing to be absorbed.Though the American buck did weaken post payroll data, the labour market will likely help ease the Fed’s concerns that the tightening of global financial conditions are in the process of derailing the American economy.While Friday’s labour market data will unlikely shift expectations for any movement out of the Fed at their monetary policy meeting later this month, the market has begun pricing in a greater chance of a Fed rate hike this year.Just like we felt the Fed thinking that four rate hikes in 2016 was a little optimistic, we continue to believe that market positioning of no rate hikes in 2016 is too pessimistic.The DXY index took a breather after Friday’s jobs numbers, but we would expect that we see further upward momentum in the dollar index as market participants move forward their expectations and continue to put a greater probability of an interest rate increase at the June meeting.