Weekly Market Update 10 July– Dollar Reverses Gains as Non-Farm Payrolls Fall Short of Expectations
Weekly Market Update 10 July– Dollar Reverses Gains as Non-Farm Payrolls Fall Short of Expectations
1. The dollar initially gained but later declined below the level of 102.3 following the release of weaker-than-expected labour market data. ISM manufacturing PMI came in at 46.0, falling short of the market consensus. The FOMC minutes revealed unanimity amongst officials for the target range for interest rates to be at 5% to 5.25%, though some were in favour of a quarter-point increase. Investors now estimate an 85% probability of a rate hike in July. Additionally, the ADP Non-farm payrolls report showed the creation of 497K jobs, surpassing the forecasted 226K. The ISM services PMI exceeded expectations at 53.9. The JOLTS job opening report revealed a decrease in job vacancies to 9.82M in June. However, the rise in the quit rate to about 2.6% of the labour force suggests a potential driver of persistent wage inflation and overall inflation. The increase in quit rates and job-to-job mobility could triggered a wage spiral that contributes to overall inflation. However, the gains made by the dollar were quickly erased as non-farm payrolls increased by 209K in June, below market estimates of 224K. Ahead of July rate decision, market can expect the release of the CPI y/y, forecasted at 3.1%, and the PPI m/m, forecasted to show 0.2% growth this week to gain a better understanding of the economy’s inflation outlook. Consumer sentiment survey will be released on Friday, providing insights into consumer expectations regarding long-term inflation.
2. The euro recovered from losses and strengthened against the weakened dollar, closing the week above $1.09, upon hawkish comments from ECB President Lagarde on Friday, who expressed a determination to address high inflation driven by business profit margins and wages. Despite this, eurozone manufacturing PMI contracted more than expected at 43.4, and services PMI declined to 52.0 in June, below the forecast of 52.4. It is expected that market focus this week will be on German ZEW economic sentiment, German and French CPI figures for insights on eurozone inflation direction, and the ECB Monetary Policy meeting accounts to gain a better understanding of the ECB’s policy stance.
3. The pound sterling surged above $1.28 against the dollar, driven by the assertive policy stance adopted by BOE’s Mann. The final manufacturing PMI exceeded market expectations at 46.5, while the final services PMI matched estimates at 53.7. BOE’s Mann emphasized the importance of proactive policy decisions in the face of inflation uncertainties, prompting investors to anticipate another half-point interest rate hike at the next meeting, potentially reaching a peak of 6.5%. Market can anticipate data on claimant count change and GDP, as well as a speech by BOE Governor Bailey, to assess the labour market conditions, economic well-being of the UK amidst rapid rate hikes, and gain insights into future policy decisions.
4. Among the commodity currencies, the Kiwi benefited from the dollar’s weakness while the Loonie and Aussie struggled for direction. Volatility was pronounced in all three currency pairs, as traders received two different pictures of the US jobs market. The Kiwi climbed above $0.62 against the dollar midweek, despite opening slightly higher than $0.61. This high of $0.62 was re-visited again at the week’s close. With the RBNZ having ended its rate hike campaign in May, markets expect them to keep the status quo at this Wednesday’s policy meeting. Expectations that the RBNZ will keep rates high–the highest in the developed world–continue to support the Kiwi, although there are growing concerns that the economy will continue shrinking if the RBNZ does not cut rates soon. The Aussie inched upwards against the dollar to $0.669, but not before touching $0.66 and $0.67 in the week. The RBA kept rates unchanged at its policy meeting last week, choosing to hold off until the release of CPI data at the end of this month, but experts seem further room for hikes. Another reason for the RBA to go slowly is the large percentage of Australian households that are due to transition from fixed to floating rate mortgages. Elsewhere, the Loonie slid to close nearly flat against the dollar, with USD/CAD testing $1.34 at one point before ending the week below $1.33. With job growth running hotter than expected, coming in at 60k instead of a forecasted 20k, markets expect the BoC to raise rates by 25bps again at this Wednesday’s meeting. However, markets are expecting the BoC to pause after this hike, keeping a lid on the Loonie’s strength.
5. Brent crude rallied to a high of $78 per barrel, continuing a second-straight week of gains after moves by Saudi Arabia and Russia to keep oil exports down. Saudi will continue its 1 million barrel-a-day reduction till August, while Russia will cut by 500,000 barrels a day in August. Saudi also unexpectedly raised prices of its oil for the US, Europe, Mediterranean, and Asia markets. Gold remained range-bound last week, closing near $1924 per ounce after recovering from $1902. A survey showed that central banks continue to seek gold as an alternative to the dollar and the Western-dominated financial system, while China kept up its gold-buying activities for the eighth straight month. Still, continued rate hikes by the Fed could see further downward pressure on non-yielding bullion.
