The US employment report left markets spinning on Friday. While nonfarm payrolls overcame expectations by a solid margin, the unemployment rate paradoxically rose a touch, baffling traders and sparking a fresh round of volatility in most assets. The two numbers come from different surveys, so they don’t always move in lockstep.
Investors ultimately reached the verdict that this employment report was the best of all worlds - strong, but not strong enough to force the Fed to take its foot off the accelerator straight away. This saw the market price out some Fed tightening risk, with the dollar and Treasury yields getting knocked down while stocks powered to new record highs.
Nonfarm payrolls hit the sweet spot
Of course, all this might be wishful thinking. This jobs report wasn’t sizzling hot, but it was still more than solid. The U6 under-employment rate fell substantially. With the US economy overflowing with open jobs and the beefed-up unemployment benefits having already expired in many huge states like Texas and Florida, next month’s jobs report could be scorching hot.
Where does this leave the dollar? In a nutshell, this retreat might be just a bump in the road. The labor market recovery will likely accelerate, the Biden administration is committed to raising real wages, and inflation might not cool quickly if rents go wild once the eviction moratorium expires this month. All this argues for the Fed to dial down its asset purchases soon, which spells upside risks for the dollar against low-yielding currencies like the yen.
OPEC meeting drags on as producers can’t agree
Over in energy markets, OPEC and its allies failed to agree on a path forward for production increases last week. The negotiations will continue today. Most members want to raise supply by a total of 2 million barrels by year-end, but the United Arab Emirates is blocking this proposal, seeking better terms for itself.
Some compromise will most likely be reached soon, as the stakes are too high. Nobody wants to return to the ‘pump at will’ regime that prevailed early last year, as that would damage both revenues and market stability. Judging by the fact that oil prices remain elevated, investors seem to agree.
All told, oil prices have been trading like a runaway train lately, but it’s becoming harder to envision massive gains from here. More supply is coming back online both from OPEC and US shale producers, while the demand outlook is looking shaky with the Delta covid variant spreading like wildfire.
RBA - Half measures?
The next event to inject some volatility into the FX arena will be the Reserve Bank of Australia meeting early on Tuesday. It will be a tricky one. On the bright side, the Australian economy is doing phenomenally well. The unemployment rate reached pre-pandemic lows in May already, the housing market is booming, and the prices of commodities that Australia exports are high.
The catch is that half the country is now back in a lockdown after new clusters of infections popped up, and vaccinations have been slow. Until recently it looked like the RBA would move towards exiting cheap money, but with the latest lockdowns, it might resort to ‘half measures’. It could adopt a more flexible approach to its bond purchases, which would essentially be a tapering move, but stress that it doesn’t expect to raise rates for a long time, negating any massive rally in the aussie.
US markets will remain closed today for Independence Day, so liquidity will be thinner than usual, making sharp market moves possible without much news behind them.