Strong NFP Report Sparks a “Feel-Good” Rally
The US dollar is surging against the euro and Japanese yen following Friday’s strong NFP figure. Meanwhile, the ECB’s commitment to more aggressive easing measures has already come into question.
According to Friday’s non-farm payrolls (NFP) report, the labor market is back, and the US dollar (USD) is rallying, so expect a good day for risk and new highs for stocks.
The dollar soared against all major currencies following better-than-expected labor market numbers. Non-farm payrolls increased 165K in the month of April and the unemployment rate dropped to 7.5%. Private sector job growth was very strong, with last month's exceptionally weak report revised up from 88K to 138K.
Average hourly earnings also increased 0.2% last month, but even though this morning's labor market report was solid and the “feel-good” factor should last, the data was not unambiguously positive. Manufacturing payrolls were flat, average weekly hours declined, and the broader U-6 unemployment rate increased to 13.9% from 13.8%.
None of this matters, however, because the sheer of relief that payrolls exceeded 150K will be enough to drive USDJPY towards 100 and EURUSD to 1.30 because it means that the Federal Reserve won't need to consider increasing asset purchases.
In fact, when the Fed said they could increase or decrease stimulus this week, we were extremely skeptical that they shifted their bias from the possibility of tapering asset purchase to increasing them, especially since they left their assessment of the labor market unchanged. The “glass-half-full” view of jobs is also one of the main reasons why we leaned towards a stronger NFP number today.
ECB Changing Its Tune on Easing Already
Better-than-expected US data stands in stark contrast to the European Commission's lower Eurozone GDP forecasts. The EC now expects GDP growth in the region to contract by -0.4% compared to a previous estimate of -0.3%.
The big change was in France, where the economy is expected to contract by 0.1% instead of grow by 0.1%. The recovery in 2014 is also expected to be weaker, now estimated at 1.2% vs. 1.4% previously. For the EURUSD, this means a test of 1.30 is likely, but the 1.2950 level is the key price point to watch.
Meanwhile, according to this morning's comments from European policymakers, not everyone is on board with the idea of negative deposit rates. During early-European trading today, European Central Bank (ECB) members Ewald Nowotny and ErkkiLiikanen said the market over-interpreted the possibility of negative rates, while Yves Mersch said no major central bank has a negative deposit rate and the ECB has to be careful about unintended consequences.
However, closer to the North American open, Nowotny felt the need to clarify his stance because he was surprised by the reaction to his earlier comments. He has since repeated ECB President MarioDraghi's view that the Bank has an open mind about negative rates, but that it is "not imminent."
These back-and-forth comments from European policymakers signal that the primary goal yesterday was to appear to more flexible and willing to do more, when in reality, they are very cautious about any additional actions that may be taken.
By Kathy Lien of BK Asset Management