America’s roaring labour market added a stronger-than-expected 390k jobs in May, while the unemployment rate held steady at 3.6% even as the labour force participation rate improved slightly. The upbeat numbers dashed hopes that the Federal Reserve would be in a position to take time out from bumping up the borrowing cost later in the year after it opened the door to doing so in the May meeting minutes.
- US economy still churning out jobs but Fed may have to keep hiking by 50 bps
- Stocks rebound after NFP-led dip as yields advance only marginally
- Euro slightly firmer ahead of ECB, pound shrugs off Johnson confidence vote
Cleveland Fed President Loretta Mester further threw cold water on the idea on Friday, saying that she would need to see “compelling evidence” that inflation is on a downward path before deciding not to continue raising rates by 50 basis points in September.
There could be some “compelling” signs that inflation is moderating as early as this Friday when the next CPI data is due in the United States. CPI inflation is expected to have stayed unchanged at 8.3% y/y in May, which would mark the second-straight month that price growth has not spiked to fresh decade-highs.
Strong NFP: a case of glass half full?
However, whilst investors were clearly jolted by Friday’s jobs report as more aggressive rate hikes loomed for the remainder of 2022, some think that the robust figures might not necessarily pose such a danger to the policy outlook. The fact that the labour market remained so resilient in May when the Fed had already hiked twice and inflation was so high is encouraging and increases the likelihood that policymakers might yet manage to engineer a smooth landing for the economy.
Stocks rebound from NFP losses
That sentiment is likely contributing to the recovery in risk appetite on Monday as the knee-jerk reaction to the jobs data fades and might also explain why Treasury yields are climbing only modestly on the back of it. The S&P 500 tumbled by 1.6% on Friday, ending the week down. The Nasdaq 100 slid even more, but e-mini futures for both pointed to solid gains on Wall Street today as European shares rebounded too.
Asian stocks were mostly positive, aided by news that virus restrictions in the Chinese capital – Beijing – are being relaxed, which comes almost a week after Shanghai emerged from a two-month lockdown. The easing of China’s tough Covid curbs should go some way in alleviating the constraints on global supply chains and this in turn could substantially depress price pressures.
Furthermore, US President Joe Biden seems to be going ahead with plans to look into whether some of the Trump-imposed tariffs on Chinese imports can be removed to relieve some of the cost burdens on businesses. With the Fed entering its blackout period ahead of the June 14-15 meeting, these positive developments could keep the mild risk-on vibe going, at least until Friday’s inflation numbers.
Euro and aussie eye rate decisions, pound rallies ahead of Johnson vote
The US dollar was marginally lower in European trading today, erasing some of Friday’s gains. The safe-haven Japanese yen struggled too, though it firmed slightly against the greenback. The euro inched up to the $1.0740 region as investors bet that the European Central Bank will announce the end of its bond purchases on Thursday when it meets and signal that rates will begin to go up in July. The size of the July rate hike is the main uncertainty from the meeting as far as markets are concerned, hence, that’s what will likely stir the euro the most.
The pound was a surprise gainer and biggest FX winner on Monday, as traders returned from the long holiday weekend. Unfortunately, Prime Minister Boris Johnson’s first day back from the Queen’s Platinum Jubilee celebrations isn’t turning out so well as he is facing a vote of no confidence by his own MPs.
Following Johnson’s refusal to resign over his involvement and failings in the partygate scandal, at least 54 Tory MPs have now submitted letters of no confidence, which is the threshold required to trigger a leadership challenge. The vote is expected to take place as early as today. However, sterling’s rise suggests traders think Johnson will win the no-confidence vote, ending months of uncertainty about his future as prime minister and drawing a line under the whole debacle. The Australian dollar also recouped some of Friday’s losses, though traders were cautious ahead of the RBA’s policy decision on Tuesday amid some doubts as to how aggressively policymakers will act.