US nonfarm payrolls won 8217 t interrupt end of QE3

The August US jobs report disappointed in the way of non-farm payrolls emerging at 142,000, well below consensus expectations of 230,000, which is the first sub-200,000 print in seven months. Notably US equity futures are not selling off as the unemployment rate slipped to 6.1% from 6.2%, but that is partly due the labour force participation inching down to 62.8% from 62.9%. Since average hourly earnings continued to rise, this overcomes the notion of weak wage growth and maintains the Fed on course to taper its asset purchases at this month’s FOMC meeting, with the plan to end QE3 next month.

Another divergence in stocks & yields

Similar to last month’s release of the US jobs, which also disappointed (209K vs. expected 230K & prior 298K), stocks and bond yields today went in their opposite direction, with equity futures trimming their pre-report losses, while the 10-year bond yield fell from a 4-week high of 2.47% to 2.40%.

Overall picture remains dominated by these positives:

-      Construction, professional/business services and education/health sectors all continued to produce robust net increases in employment.

-      Retail sector lost 8,000 jobs, its first decline since February, but this was the fourth decline over the last 24 months.

-      Average hourly earnings remained positive for the 13^th consecutive month.

USD gets another boost from policy contrasts

Today’s US data disappointment emerges in the aftermath of a relentless string of stronger than expected US figures over the past two weeks and the reaffirmation of sub-par growth in the eurozone, leading to deeper negative interest rates. With ECB president Draghi noting the asset-backed purchase program implies a return of the central bank’s balance sheet to “to the beginning of 2012″, and the Fed wrapping its asset purchase program next month, the dollar index is on the cusp of breaking above a nine-year channel. The six-currency basket index is on its way to completing its eighth consecutive weekly rise for the first time since 1997 –a time when US-bound capital flows were bolstered by the tech boom and by the prevailing strong dollar policy.