With the saga of the US debt ceiling now in the rear-view mirror, attention has shifted over the past couple of days to how the global economy is doing, and more significantly increasing evidence that inflation is slowing sharply.
While we’ve known for some time the manufacturing sector has been struggling, with resilience of the services sector, and robust employment numbers has offered encouragement that this is likely to be manageable.
This week’s economic data has prompted a modest reassessment of this, as bigger than expected slowdowns in headline inflation has prompted concern that a wave of deflation is on the way. On some level this is welcome particularly since it is sharp falls in energy prices that have been driving it, however we are also seeing evidence of weak demand, and that is more worrying with the China recovery story already running on fumes.
While price pressures have been subsiding for several months, as shown by sharp slowdowns in the headline rates of inflation, core prices have proved to be stickier, however this week we saw the first signs that here may also be starting to see prices turning lower.
This has been reflected in a move lower in yields and a decline in the US dollar over the last couple of days, while stock markets have also seen a modest rebound, after this week's early weakness, with some Fed speakers becoming more vocal in signalling a rate pause in June.
All of this is very welcome; however, it makes the next move for central banks trickier when it comes to whether to slow or pause their rate hike pathway. There is already much debate over whether the Fed may pause on rate hikes when it meets in just under two weeks’ time, with pricing split over whether we’ll see another 25bps hike or a pause and a hike in July.
Today’s US non-farm payrolls numbers could go some way to answering that question, along with the May CPI numbers which come a day before the Fed is next due to meet. The resilience of the US economy has continued to manifest itself in the jobs data this week, despite concerns that a slowing economy will start to see jobs growth falter.
While the monthly payrolls numbers have been slowing in terms of the numbers of jobs being added on a monthly basis, economists have consistently underestimated the resilience of the labour market over the last few months, even with the recent turmoil in the banking sector hitting business and consumer confidence.
This week we saw the number of job vacancies push back above 10m in April, while the ADP payrolls report yesterday for May, saw 278,000 jobs added, well above forecasts of 170,000. Today’s non-farm payrolls numbers for May could follow the trend of the last few months, which has seen the headline numbers consistently beat forecasts, with the April jobs numbers being the latest, adding 253,000 jobs while the unemployment rate fell to 3.4%.
Wages growth has also remained sticky edging up to 4.4%, although there have been pockets of weakness in the form of downside revisions, which saw a negative -149k adjustment to the previous 2 months, last month, taking some of the gloss over the broader numbers.
What the numbers don’t do is support the idea that the US economy is struggling, particularly when vacancy rates continue to remain high, even as the overall number has fallen by more than 2m since the peaks of March last year. Nonetheless the number of vacancies remains eye-wateringly high and well above the levels before the pandemic, which would suggest the labour market is likely to remain resilient for some time to come.
The participation rate has also been rising and is at its highest level since before the pandemic at 62.6%. Today’s jobs numbers are expected to see 195,000 jobs added, and for the unemployment rate to edge higher to 3.5%.
EUR/USD – has pulled away from the lows of the week at 1.0635, with short term resistance currently at the 1.0780 area. A break here could see a further move towards the 1.0820 area.
GBP/USD – broke above the 1.2450 area and the 50-day SMA, pushing up through the 1.2520 area, with the prospect of a move towards 1.2630 and trend line resistance from the 2021 highs. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.
EUR/GBP – continues to look heavy with the December 2022 lows at 0.8558, the next key support. A break of 0.8550 targets 0.8480. The 0.8620 area now becomes resistance with major resistance behind that at the 0.8720 area.
USD/JPY – has declined for 4 days in succession, after running into selling pressure at the 140.90 level earlier this week. Now we’re back below the 139.60 area the risk is for further weakness back towards the 137.00 area.
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