The Federal Reserve can breathe a sigh of relief after seeing this morning’s non-farm payrolls report. While 114k jobs were created in the month of September, 46k more jobs were added to August payrolls (bumping it up from 96k to 142k) and more importantly, the unemployment rate dropped from 8.1 to 7.8%. This is the first time in more than 3.5 years (almost a full Obama term) that the jobless rate fell below 8%.

President Obama’s chances of reelection soared with today’s labor market report – he can now say that the unemployment rate is lower than when he took office. Obama “owned” the U.S. economy in January 20, 2009 and the first unemployment report he was responsible for was February 2009 and that month, the jobless rate was 8.3%. Throughout his term, the rate never dropped below 8% until now. Yet while we are happy to see the improvement in the household survey, we cannot ignore the fact that the household survey and the establishment survey are painting completely different pictures of the U.S. labor market. The household survey, which calculates the unemployment rate, has shown a dramatic improvement while the establishment survey, which provides non-farm payrolls continues to report sluggish job growth. The difference is labor market participation, which is captured by the household survey. More people are finding part time work, are self-employed or contractors working at home and this is confirmed by the steady U-6 unemployment rate.

Even though fewer jobs were created in September compared to August, the rise in non-farm payrolls was still better than many investors had anticipated. Going into the NFP release, the market had been bracing for the worst but with payrolls coming in line with expectations, investors quickly turned to the other labor market numbers. Aside from the sharp improvement in the unemployment rate, average hourly earnings and average weekly hours also increased. The only bad news was in the manufacturing sector which shed jobs for the second month in a row.

The U.S. dollar responded positively to the NFP report, rising strongly against the Japanese Yen and after an initial sell-off, the EUR/USD recovered its losses quickly and is now trading higher than its pre-NFP levels. This should be a good day for risk but we must remind traders that today’s NFP report won’t make the Federal Reserve any less dovish. It is far too early to tell whether these improvements are sustainable and the central bank has already pledged to keep monetary policy easy even after the U.S. economy recovers.

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