US dollar rebounds after non-farm payrolls. What’s driving it

The US dollar has recouped the non-farm payrolls declines and — in most cases — even more.

EUR/USD is down to 1.0560 from a high of 1.0630.

I think — or at least hope — that most of this is on a deeper dive into non-farm payrolls. You essentially have two surveys and the establishment number was good (227K compared to 200K prior) while the household survey was softer with 355K jobs lost and unemployment at 4.2457% vs 4.145% prior.

The thing is, the response rate to the household survey has been dropping and the Fed has been skeptical of the month-to-month volatility.

Despite that, the market is right about non-farm payrolls adding to the odds of a cut in December. That’s risen to 83% from 70% before the data. It would have taken a real blockbuster jobs report to dissuade the Fed.

However looking further out, the jobs report doesn’t show any deterioration in the economy and should keep the Fed from cutting too deeply. You can contrast that to Europe or Canada which have every justification to cut rates to 2.00% in time, or lower.

Now the alternative explanation for the dollar strength — which I hate — is that the UMich sentiment survey was hotter and that comments from Fed Governor Bowman were hawkish. The UMich survey is highly influenced by politics and offers little indication on spending while Bowman is always hawkish.

Here is a take from former Boston Fed President Eric Rosengren that’s somewhat relevant:

Expect a hawkish cut at the fed meeting. 25 basis point cut but further improvement in inflation necessary for further cuts. Expect SEP to have fewer cuts next year than the September SEP with significant uncertainty about fiscal actions on trade and immigration.

What makes the dollar bounce somewhat puzzling is that Fed odds haven’t moved since the initial NFP swing and US short-dated yields are at the lows.