US stocks continued to climb Monday with traders increasingly focusing on how Fed members have responded to Friday’s the shockingly low nonfarm payrolls report.
There are three ways the low nonfarm payrolls have been interpreted:
As a sign that the US economy is slowing and the Fed should wait for more data before raising interest rates, as was suggested by Fed governor Brainard, a known dove in her speech on Friday.
Considering that there was no warning about a low payroll figure from jobless claims through the month from jobless claims or ADP payrolls, and with the unemployment rate falling to 4.7% from 4.9%, the payroll data could be an outlier with the potential to be revised back upward. Over the weekend, Cleveland Fed President Mester indicated one data point doesn’t change her thinking on gradual rate increases.
A slowing in job growth could also be a sign that the US is nearing full employment. Boston Fed President indicated the 4.7% level has reached his estimate of full employment. He also suggested, however, that while he supports rate hikes over time, it remains to be seen if the May payrolls are an anomaly or the start of labour market slowing.
The last word on the matter fell to Fed Chair Yellen who having been handed every reason to hit the panic button and talk dovish, opted for a very neutral tone. In fact she seemed to go out of her way to talk supportively about the economy and dampen fears the low payrolls could be a sign of a slowdown.
She gave a balanced assessment of the nonfarm payrolls report noting that while the headline number was disappointing, people shouldn’t read too much into one number. She also indicated she saw average wage growth at 2.5% as a positive sign. Dr. Yellen also noted inflation remains low but she expects it to pick up over time as oil rebounds and USD levels off. She also mentioned overseas developments as a headwind but focused more on China and didn't mention Brexit at all.
She indicated that current US monetary is not as stimulative as it seems but still supports gradual rate hikes over time without mentioning a date on when rates may rise again. She also mentioned that US consumer spending has picked up and that FOMC forecasts will also be coming out at next week’s meeting and suggested in a normal economy interest rates would be higher by now.
Based on these comments I now suspect the Fed will hold rates next week blaming the need for more employment data (rather than Brexit) and raise its forecasts to signal toward a rate hike in July.
Trading action in Europe was also significant today. A number of polls were released indicating the Leave side gaining momentum heading toward the Brexit referendum. In response to this news, GBP had a couple of small pulses downward that didn’t get very far or last very long while the FTSE gained 1.0% outpacing the 0.2% gain in the Dax
to the upside. Overall, fears about a Brexit scenario continue to fade in the markets as a very close vote and potential Leave win become priced in.
USD paused at a lower level following Friday’s big takedown igniting rallies in commodity markets including a 1% gain for crude oil, 2% gains for corn and wheat and a 3% gain for rice. Gold and JPY dropped back as improved economic confidence from Fed Chair Yellen brought capital back out of defensive havens. This put pressure on gold stocks while base metal miners and energy stocks rallied.
The S&P/ASX has been climbing overnight but could see mixed action ahead of today’s RBA meeting while AUD has paused against USD to consolidate last week’s big breakout. The RBA is not expected to do anything on interest rates having delivered a surprise 0.25% cut last month. With GDP coming in strong, employment steady, inflation soft and PMI reports mixed (manufacturing worsened, services improved), the central bank may hold off for a bit to assess the impact of its previous rate cut. The dollar is about where it was a month ago but has been recovering in recent days so we could see bearish talk in AUD in a bid to put a cap on the rally.