US employment gains help support dollar
Solid US non-farm payrolls for May saw the dollar gain slightly on the euro on Friday, the single currency dipping just below $1.14 at the end of last week, however the dollar is losing out as markets open this week and the euro has taken back some of its losses and is back up to $1.1425. The euro also lost a marginal amount of ground to sterling, and is trading at 84.2p currently. Sterling did lose out to the dollar however, getting down to the lower end of $1.35 but, again, the dollar is slipping this morning with the trade back up above $1.3550. There is a limited amount of US data out this week, and we are also now in the Fed’s communications blackout period ahead of the FOMC meeting, but we could still be in for another volatile week for the dollar given uncertainty driven by the political situation there.
US bonds saw a rise in yields, with the market interpreting the better employment data as backing up the Fed’s view the labour market is solid, and that they may hold off on restarting rate cuts for longer than was priced in. 10-year yields rose 12bps to 4.5%, shorter dated bonds also saw yields rise with 2-year and 5-year yields all currently over 4% now. The positive sentiment also supported equities with the S&P up 1% for the day and breaching 6,000 again for the first time since late February. Other US indices made gains on Friday also as did European indices.
US non-farm payrolls rose by 139k in May, slightly ahead of expectations. The unemployment rate was unchanged at 4.2%. While markets reacted positively to this data, the details showed that the labour market situation in the US may be softening. The pace of jobs growth slowed last month compared to the rate 3 months ago, and there were a net 95k jobs removed in revisions to the previous two months data. The unemployment rate was steady but chiefly because the participation rate fell, indicating people left the labour force rather than because of employment growth. The labour market situation is still healthy but these signs of weakness will be closely watched by the Fed if not markets immediately.
ECB member Schnabel said the Euro Area should capitalize on the policy uncertainty in the US and give the Euro a greater role as a global currency. She said there is now a ‘window of opportunity’ to strength the euro’s global role amid signs she sees that investors worldwide are focusing on Europe to diversity and saying this could have a ‘positive confidence effect’ . Her comments echo calls from other ECB members, including President Lagarde, who says now is a ‘prime opportunity’ for a ‘global euro moment’ and called on politicians on the continent to push forward capital investment and maintain macroeconomic and political stability.
Looking to the week ahead, the economic data calendar is reasonably light. In Europe , while there is a great number of ECB speakers, the only data of real note is industrial production and investor confidence. In the UK, we get labour market and GDP data for April as well as the RICS house price balance while in the US, we have NFIB small business optimism, inflation data and University of Michigan sentiment.