US NFP Surprises Forecasts, USD Strengthens (Initially) – Update

The unemployment rate declined to 8.5% beating expectations of 8.7%.

Here's a breakdown of the Establishment survey part of the report:

• Service sector added 164K jobs.
• Manufacturing saw a 23K gain, and goods producing as a whole was up 48K.
• Transportation and warehousing rose 50.2K.

Overall this is a positive report showing that the momentum in the US economy continues and should continue the growth divergence or decoupling story that has developed between the US and Europe and parts of Asia.

It should also work to lessen the expectations of QE3 by the FOMC anytime soon (next 3 months). The Fed of course is very concerned with unemployment as that is one of its mandates and today's report shows that the economy finally is adding more jobs than needed to keep up with new entrants into the labor force.

The unemployment rate decline is a positive. Let's check the Household Survey.

The number of employed rose by 176K. Combing the new employed and those leaving hte labor force (50K) we see a 226K drop in those considered unemployed.

(Update - 9:30AM ET) The overall number may be pumped up by seasonal adjustment quirks according to Morgan Stanley.

From ZeroHedge: Enamored with the 200,000 number? Don't be - the reason why the market has basically yawned at this BLS data is that as Morgan Stanley's David Greenlaw reports, 42,000 of the 200,000 is basically a seasonal quirk, which will be given back next month, meaning the true adjusted number is 158,000, essentially right on top of the expectation. From David Greenlaw: some of the strength in this report should be discounted because of an seasonal quirk in the courier category of payrolls (Fed-ex, UPS, etc). Jobs in this sector jumped 42,000 in December, repeating a pattern seen in 2009 and 2010 (see attached figure). We should see a payback in next month's report.

Implications for the USD

The interesting implication here is that because this report likely knocks back expectations for more QE it helps the fundamental picture of the USD. Despite stocks being higher, the USD strengthened against the euro, pound, and even held its own versus the commodity bloc currencies in the first 30 minutes of trading following the report.

That means we have a bit of breakdown of the normal correlation in which stocks and the dollar move in opposition. Still commodity currencies are faring better in non-USD crosses, especially against European currencies.

Is the time finally here when the USD starts gaining off of its own fundamentals data or will we return to a more familiar risk dynamic as we move through the rest of the session and see how this new dynamic regarding US data/QE expectations play out as we move through the next few weeks.

- Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.