U.S. jobs report disappointed for the second month in a row. Headline data shows that 559,000 new jobs were added during the month of May, when the consensus expected 675,000 new jobs. Unemployment dropped to 5.8%, which remains higher than the pre-pandemic level of 3.5%. Whilst the recovery is still intact, the pace of the change, or delta, seems to have slowed down. Around 75% or 390,000 jobs were added in the sectors battered most by the pandemic, such as education, local government, childcare, airlines and leisure / hospitality – a clear indication of re-opening and successful vaccine programs allowing children to return to the classroom and parents to their jobs. Despite the relatively strong recovery in recent months, the labor market is still short of 7.6 million jobs, compared to pre-pandemic levels.
The markets were clearly disappointed, especially after a strong ADP Employment change report a day earlier. ADP report surprised to the upside with 978,000 new jobs added, versus the consensus expectation of 650,000. U.S. dollar index DXY jumped at the back of ADP data, closing the day 0.65% higher, near 34-day exponential moving average resistance level. The following day with a disappointing non-farm payroll report forced the Greenback down again, finding support near the 8-day exponential moving average. We believe the dollar continues to slide lower during upcoming days and weeks, potentially moving sideways between $90.2 and $89.6 levels that have proven to offer support and resistance previously. Swing low of $89.2 is only a percentage point away from current levels and likely to be tested as well.
The main market mover this week is the U.S. CPI data print, published on Thursday. The consensus expects YoY core inflation to touch 3.0%, after spiking to 3.4% in April. We saw the highest price increases last month in used autos and trucks, but also in airline tickets and events prices. These pressures are likely to continue this month as the economy is re-opening rapidly and people are increasingly becoming mobile again. What remains to be seen is whether the price pressures from the housing sector are having an impact on rentals. Consumer Price Index has been constructed in such a way that only owner’s equivalent rent, i.e., rentals, is taken into consideration, omitting residential real estate market and related price swings. Whilst the residential real estate market is red hot – prices have jumped 17.6% on an annualized basis since October last year, the rental market is not indicative of that bubble yet. In fact, the shelter component was largely flat last month, signaling that renters still had negotiating power.
It seems likely that CPI might offer another surprise to the upside but with the Fed currently in Blackout period and weak jobs report we don’t foresee sustained volatility in FX markets. The dollar might rise on the back of high CPI number but is likely to retreat in a similar fashion we saw last month.
S&P 500 closed last week up 0.61% at 4,229.88 points, while Nasdaq-100 rose 0.62% to 13,770.77 points. Russell 2000, representing U.S. small and medium companies, gained 0.77%. Risk assets were supported by somewhat flat dollar as DXY index rose 0.09%. Gold shed 0.63% last week, closing the week at 21-day exponential moving average, while oil had another stellar week, gaining 4.18%, after comments from OPEC about thinning supplies and increased demand for the second half of the year.
Have a great trading week ahead!