Friday’s US non-farm payrolls report was once again the victim of high expectations that were left unfulfilled. A figure of 559,000, as well as a disappointing April adjustment to 278,000, wasn’t what investors had in mind in the wake of the strong ADP report the day before, which helped to push both long-term yields, as well as the US dollar, higher.
One thing Friday’s lacklustre payrolls report did do was push back the prospect that the Federal Reserve might feel compelled to look at some form of taper when it meets after the Jackson Hole symposium. Having said that, while the US dollar sold off on Friday, tempering some of its weekly gains, the outlook for the US economy still looks fairly solid, despite the slide in yields.
What the May jobs report does tell us is that despite the high levels of vacancies being reported, there is a reluctance on the part of US workers to return to work. This in turn appears to be putting upward pressure on average hourly wages which rose from 0.4% to 2% while the drop in the participation rate to 61.6% showed that US workers aren’t in any rush to return to the workforce, despite unemployment falling to 5.8%.
This flies in the face of optimism that the economic reopening would prompt a rehiring blitz, making it much less likely that the Fed will look at an early tapering of asset purchases. This lack of a pickup in hiring trends tends to suggest that the generous unemployment benefits from the March stimulus package are acting as a brake on workers returning to the workforce, and that it will be quite some time before the Fed sees “substantial further progress” in hiring trends. While some US states are already cutting back on some of the benefits, it could well be September before these effects start to dissipate, when the current benefit program expires.
Having seen markets react positively to Friday’s slight miss on the payrolls front, attention this week is set to turn to the other part of the Federal Reserve’s mandate, namely inflation, and it is here that we could well see yields start to edge higher again, when we get the latest May CPI numbers later this week. With US hiring trends remaining on the low side, relative to market expectations in March, inflation could well be the area which starts to raise concerns about rising price pressures and start to unsettle the markets again. US CPI is expected to rise from 4.2% to 4.7%, however there is a real risk we could well come in much higher than that if recent PPI trends are any guide. If we get a number anywhere near to 5%, then we could well expect to see the US dollar start to edge back up again, along with yields.
Having seen European markets end last week on a high, with the DAX closing at a record high, along with the Stoxx600, US markets also managed to eke out a weekly gain, after a strong Friday session. Despite Friday’s strong finish in the US, European markets look set to open the week slightly on the back foot after the latest China trade data for May showed that exports slowed more than expected, rising 27.9%, although imports rose from 43.1% to 51.1%, while US Treasury Secretary Janet Yellen said that higher interest rates might not be such a bad thing in comments made at the weekend, helping to push US bond yields higher, and take some of the steam out of last weeks end of week rebound in stock markets, with markets in Europe set for a slightly lower open.
In other news, a lot has been made of the G7 deal that was agreed over the weekend with adjectives like “historic” and “ground breaking” being used. The reality, despite all of the hyperbole, is that ministers agreed a woolly statement that pledged to discuss the minutiae of a deal next month. Furthermore with a proposed new global minimum tax rate of 15% any agreement is unlikely to make that much difference given that Ireland is the only economy in Europe that this statement of intent will currently affect, with rates at current levels.
Obstacles to an agreement also remain high with the finer details needing to be agreed by the G20 next month, as well as the OECD, which means while this weekend’s statement can be described as a starting point for some form of framework, we know from experience, it could be years before any sort of deal starts to take shape, let along get implemented by way of legislation. We only have to look at the failure of the Doha Round to know how difficult these sorts of talks can be, and if trade is difficult then tax is hardly likely to be less so.
With the likes of a number of European countries determined to ensure US tech companies pay more tax in the regions they conduct their business, and reluctant to drop their own plans for digital taxes, the reality is the US administration will need to get buy in from Congress on any new tax format, and that is by no means certain, which means a clash is likely to come sooner rather than later, with the US opposed to the principal of a digital services tax on its major tech giants.
EUR/USD – Friday’s rebound from 1.2104 has seen a rebound back towards the 1.2190 area, with the May highs at 1.2266 the next resistance level. A move below 1.2100 opens up the 1.2050 area. The highs this year at 1.2345 remain a key level and barrier.
GBP/USD – the rebound off 1.4080 needs to push up through the 1.4240 area to target the 2018 peaks at 1.4375. A failure to overcome 1.4240 keeps the bias towards 1.4000.
EUR/GBP – the 0.8560 area has continued to hold on the downside. Resistance still remains at the 0.8640 area, with a break below 0.8550 opening up the recent lows at 0.8480.
USD/JPY – last week’s failure at 110.35 has seen the US dollar slip back with a move below 109.20 opening up a return to the 108.60 area.