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US dollar turns its sights to employment report

3 June 2022 Written by Marios Hadjikyriacos  XM Investment Analyst Marios Hadjikyriacos

The latest US employment report will be in the limelight today as nervous market participants search for anything that might convince the Fed to shift into lower gear later this year. There have been several signs that the US labor market is losing momentum, from a slowdown in the housing industry to a spike in seekers of unemployment benefits to the nation’s biggest employer - Amazon - warning it will cut back on hiring. 

Nonfarm payrolls playbook

Corporations are desperately trying to protect their profit margins from raging inflation, and slashing labor costs is an easy way to do so. The good news is that this trend has just started, so it is probably too early for any real weakness to show up in today’s jobs report. This is most likely a story for the summer or beyond. 

Instead, a solid report is expected overall. Nonfarm payrolls are estimated at 325k in May, the unemployment rate is seen at a five-decade low of 3.5%, while wage growth is projected to have lost some steam on a yearly basis. Labor market indicators were somewhat mixed, with the S&P Global composite PMI showing another healthy increase in employment but the ADP report falling short of expectations.  

In the markets, the playbook is that the dollar tends to spike higher or lower depending on whether the jobs numbers are stronger or weaker than expected, and then retraces the initial move in the following minutes or hours. This has been a consistent pattern since the pandemic hit - traders fade the initial spike. Nonfarm payrolls have essentially turned into an intraday volatility event, not a trend-setter like in the past. 

Oil prices rise despite OPEC action

The OPEC+ alliance announced it will dial up production to ease the shortage in oil markets. Output will be boosted by 650k barrels per day in July and August, considerably higher than the 430k increase that was planned previously. However, oil prices rose on the news, which suggests traders don’t think this will be enough to move the needle. 

It was seen mostly as a symbolic gesture rather than a sea change for thirsty energy markets, since most OPEC members are already producing below their quotas and spare capacity is dwindling. 

Wall Street and euro recover

Crossing into equity markets, the mood improved yesterday. The S&P 500 rose by 1.8% despite Microsoft lowering its earnings guidance for the current quarter, blaming unfavorable FX moves. Big multinationals seem to be feeling the burn of the dollar’s blazing rally, as it is rare for a juggernaut like Microsoft to lower guidance with one month still left in the quarter.  

With the Fed expected to keep hammering away with rate increases until inflation is under control, any bad news around the economy might even be viewed as positive for equity markets by lessening the need for rates to enter restrictive territory. Indeed, it is quite common for the dollar and US equities to move in opposite directions after nonfarm payrolls. 

Meanwhile, euro/dollar staged a meaningful rebound yesterday, recovering all its losses for the week despite some signals from the Fed’s second-in-command that it’s too early to be thinking about a ‘pause’ in rate increases. Volatility is likely to remain elevated in the world’s most traded currency pair, with next week’s highly-anticipated ECB meeting coming hot on the heels of today’s US jobs data. The ISM services PMI will be released a little later after the jobs data. 

By XM.com



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