Greenback’s Inability to Rally on Strong Employment Report is Noteworthy

The US jobs data was stronger than expected and yet the impact on the dollar is modest.  The market is as confident of a hike at the June 13 FOMC meeting as it gets about these kinds of things.

The US created 223k net new jobs.  This is the strongest since the outsized 324k increase in February and follows two soft reports (135k in March and 159k in April). 

The unemployment rate unexpectedly ticked down to a new cyclical low of 3.8% from 3.9%.  This was partly the result of a decline in the participation rate of 62.7% from 62.8%.  The underemployment rate slipped to 7.6% from 7.8%.   

Average hourly earnings rose 0.3%, a bit more than expected, but after the 0.1% increase in April, the long-run average of 0.2% increase a month remains intact.  Hourly earnings have risen by 2.7% year-over-year. Of course, the earnings increase is not equally distributed.  

As the panic seen in the European markets eases, the systemic risks are not seen as acute, and this is seeing a large in the back-end Fed funds futures.  If the Fed were to hike in June and Sept, fair value for the October contract would imply about 2.15%-2.20% yield.  It is at 2.10% today, up 4.5 bp today. The January 2019 contract implies 2.22% effective Funds Funds rate.   

The technical indicators suggest that after a sharp advance in May, the US dollar is likely to consolidate and correct lower against most of the major currencies in the coming days, with the possible exception of the Japanese yen, and to a less extent the Swiss franc.  The inability of the dollar to rally after the employment data lends credence to this view.  


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