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Dollar Slides On U.S. Payrolls Miss

Published 02/06/2017, 16:52
Updated 03/08/2021, 16:15

Europe

We’ve seen more record highs for the German DAX, FTSE 100 and FTSE 250 today as equity markets in Europe built on their progress this week, though we have slipped back from the intraday highs after US payrolls missed expectations for May. Once again a strong lead from the US ADP number prompted a case of misdirection as the official May payrolls number came in weaker at 138k, well below the 185k expected.

The worst performers have been in the basic resource sector as Iron ore, copper, nickel and zinc prices have continued to sink back, with Antofagasta (LON:ANTO) leading the decliners, though on the flip side of that Randgold Resources (LON:RRS) and Fresnillo (LON:FRES) edged higher after gold prices pushed higher, after today’s weaker than expected US payrolls report. Oil stocks have also come under pressure on the back of the slide in the oil price, with BP (LON:BP) and Shell (LON:RDSa) underperforming.

British Airways owner International Consolidated Airlines Group (LON:ICAG) may well have got off to a bad start this week with the power failure problems, however the share price has managed to recover a lot of its lost ground, despite the incident having the potential to cost the company a serious amount of money in compensation.

US

US markets opened at new record levels today despite the latest US employment report falling short of expectations for May at 138k. The fall in the unemployment rate to 4.3% was a positive development, however it was offset by the fact that the participation rate fell back from 62.9% to 62.7% suggesting that people were leaving the work force.

Some have suggested that the disappointing headline number is down to a tightening in the US labour market but that doesn’t chime with a falling participation rate and wage growth that remains stuck at 2.5%. The US trade deficit for April was also disappointing widening out to -$47.6bn.

Bond yields slid sharply with the 10 year yield slipping below the 200 day MA and hitting its lowest level since last year’s US election, reinforcing the perception that the reflation trade may well be dead. Weak wage growth and the fact that the jobs being added are fairly low wage ones suggests that consumption is likely to remain lacklustre in the months ahead, and thus acting as a bit of a drag on the US economy for the rest of the year.

FX

The pound has again come under pressure today after an ICM opinion poll showed that the Labour gap to the Conservatives had narrowed to five points, completely offsetting a very positive construction PMI report which showed that economic activity recovered to its best level since the end of 2015. The bulk of the gains came from the residential housing sector.

The US dollar has also slid back after the latest payrolls number for May came in below expectations. While the 138k number isn’t expected to be enough to stop the US Federal Reserve from raising rates in June, it does diminish the prospect of any type of move before December, simply due to the lacklustre nature of how wages are rising, at a time when core inflation seems anchored at 1.5%.

Commodities

Commodity prices have continued to fall this week with the slide in oil prices all the more surprising given the bigger than expected draws in the latest weekly inventory data. The rally that preceded the extension of the OPEC cuts in to next year seems such a long time ago now and while some have attributed the acceleration of the decline in the oil price to the US withdrawal from the Paris climate accords, it rather overlooks the fact that this can’t happen before 2019.

This week’s decline in oil prices isn't happening in isolation, and in a worrying divergence from the rise in equity markets, we’ve also seen sharp declines in iron ore, nickel and copper prices over the past few days.

If we look at demand for raw materials and rising prices as a bellwether for global growth then the current divergence between stock markets, the latest economic reports, and the trajectory of commodity prices is a worrying development which suggests that something doesn’t quite smell right in the global economy.

Gold prices moved to a one month high in the wake of this afternoon’s US data as expectation of additional rate rises beyond June got pushed further out.

Disclaimer: CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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