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US payrolls boom in January sends US dollar surging

London skyline with Gherkin in foreground

It’s been a mixed finish to what has been a positive week for European markets, after US non-farm payrolls crushed expectations, adding 517,000 new jobs in January, while the unemployment rate fell to its lowest level since 1969 at 3.4%.

Europe

The FTSE 100 has outperformed, pushing above last month’s highs and a new record high, on a combination of a weaker pound and an improved economic outlook, as decent gains from the big US dollar earners, including healthcare and basic resources, with Shell, Reckitt Benckiser, and AstraZeneca helping to underpin the UK index. 

Whilst it’s a significant moment particularly for UK investors, who have suffered from years of underperformance, there are no guarantees that we can kick on from here, but putting economic concerns aside there’s every reason to suppose if interest rates remain at current levels, that the FTSE 100 can push on further and potentially to 8,000 in the coming days and weeks. 

Also doing well is B&M European Retail, after being raised to buy by Deutsche Bank with a price target of 580p. 

US

US markets opened lower after their strong session yesterday after a disappointing reaction to last night’s numbers from Amazon, Alphabet and Apple.

The latest January jobs report has also weighed a little despite the US economy adding a staggering 517,000 jobs during the month. The participation rate rose to 62.4%, matching the highs seen last year, while the unemployment rate fell further to 3.4%. This was well beyond the most optimistic of forecasts, and sends a message to complacent investors that the idea of rate cuts by year end is a little premature, and that’s being kind. The strength of the numbers also means that we could see more than one 25bps rate hike in the coming months, especially given the strong rebound that in the ISM services index for January, which confirmed that the US economy remains far from lacklustre. 

The Nasdaq has underperformed in light of today’s stunning numbers, with yields boomeranging back from their lows, and the US dollar rallying strongly. Apple, Amazon and Alphabet have all opened lower on disappointment over last night's earnings numbers as well as the rebound in yields and a stronger US dollar. All three have blamed the strength of the US dollar for the recent underperformance when it comes to lower revenues and profits. 

Apple hasn’t stayed in the red long, rebounding from its 200-day SMA and rising sharply, despite the Q2 outlook which predicted that revenue would decline by 5% in Q2. The more positive outlook for the US economy may be helping the company here, while its Chinese markets are likely to perform better as well, as China continues its unlocking process.      

FX

If 24 hours is a long time in politics, then the same can be said for FX markets, after today’s US non-farm payrolls report blew a hole in the argument that the Federal Reserve might be done when it comes to further rate hikes, and that slowing inflation could prompt rate cuts by year end. 

Today’s bumper January payrolls report more or less guarantees that we’ll see another 25bps in March and another hike thereafter. A labour market this tight is unlikely to see inflation come down quickly, which is what markets were pricing in the lead-up to today’s numbers.

Not surprisingly, we’ve seen the US dollar rebound strongly, while yields have rebounded from their recent lows, the biggest gains coming against the likes of the commodity currencies of the Australian and New Zealand dollar. We’ve also seen the greenback rally against the Japanese yen, as traders price out the prospect of US rate cuts by year end, as the US 2-year yield reverses its weekly losses and pushes to its highest level since 12 January.  

Commodities

Gold prices have plunged on the back of this afternoon’s payrolls numbers, dropping below the lows of this week at $1,900, and could well slip back to the $1,840 area on the back of a stronger US dollar and sharp recovery in yields after today’s bumper US jobs report. 

Crude oil prices have rallied strongly on the back of the better-than-expected US employment report, and ISM services numbers, although they still look set to close lower on the week, against a backdrop of uncertainty about Chinese demand and higher than expected US stockpiles, which rose to their highest levels since September earlier this week. 


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