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UK rebound continues in May, US payrolls up next

US jobs set to rise in May

The last two weeks have seen European markets trade in a broadly choppy fashion albeit with a slight upward bias, while US markets have also remained close to their recent record highs.

We have seen the likes of the DAX and the Stoxx600 make new record highs this week, but the modest gains we’ve seen have been incremental at best as expectations about the speed of an economic reopening have ebbed and flowed.

The FTSE 100 has continued to lag behind, unable to match its highs last month, although the FTSE 250 has been able to put in a new record high this week, falling just short of the 23,000 level.

Yesterday’s continued rebound in UK services sector activity, which hit a record high, is yet further evidence of a strong UK economic rebound in Q2, however it can’t disguise the fact that there are still significant areas of the economy that are continuing to struggle, travel and leisure being a case in point, where furloughed employees still number at 2.1m.

This week’s PMIs have also shown a sharp rise in inflationary pressures, as higher costs due to supply and demand imbalances prompted the biggest rise in prices since 1996. Earlier this week the manufacturing sector showed a similarly robust level of economic activity rising to 65.6, while today’s construction PMI is expected to round off a second successive month of 60+ readings for all sectors of the UK economy, and reinforce the re-energisation of the UK economy in Q2 with another improvement from 61.6 to 62, and a seven-year high.  

The only clouds on the horizon, apart from the rain bearing variety, has been the performance of international travel stocks, which have continued to underperform after the UK government announced yesterday that no new countries would be added to the green travel list. The government also announced that a number of new countries had been added to the red list, pushing the likes of IAG finishing at the bottom of the FTSE 100, while easyJet shares also slid back. There are also concerns that we might see a delay to the 21 June reopening date, which is tempering the recovery for some parts of the UK economy.

Today’s big headline item is the US May non-farm payrolls report, after last month’s big miss caught everyone completely unawares. Lulled into a false sense of security by a bumper March number of 916,000 there was little thought as to how or why we wouldn’t get a similarly positive report in April. What wasn’t taken into account was the enormously generous boost to unemployment benefits as a consequence of the March stimulus package, which meant in a lot of cases it wasn’t worthwhile for workers to return to the labour force, hence the big miss of 266,000, while the March number was revised down to 770,000. These unemployment benefits are likely to continue to act as a brake on rehiring levels in the US labour market until they expire in September, at a time when vacancies are already at record levels of around 8m.

Yesterday’s big beat on the ADP report has raised expectations to some extent about today’s jobs number but there has been very little correlation between the two so far this year, which means that to all intents and purposes as a bellwether for today’s number it’s utterly meaningless. The May ADP report showed that the US economy added 978,000 jobs, well above expectations of 650,000, while weekly jobless claims fell below 400,000 to 385,000, and a post pandemic low, all of which should augur well, and which has seen the US dollar rally, and yields rise in anticipation of a good number today.

It wasn’t all good news however as continuing claims went up to 3.77m from 3.6m, while the employment components of this week’s ISM services and manufacturing surveys slipped back from their April levels. This slowdown in hiring that we saw in April, and which could continue in May, appears to be prompting an element of wage inflation as employers attempt to entice workers back into employment, by raising salaries.

While this may work on some level, until the US economy has completely reopened the jobs market may well struggle to return to normal, with inflation expectations also starting to rise sharply as well, increasing the prospect of chatter about a Fed tapering of bond purchases as we head into Q4. In all honesty there should be little to fear in respect of a Fed tapering of asset purchases as it would be an acknowledgment that things are improving. It certainly doesn’t mean the Fed will start to raise rates any time soon.

Nonetheless today’s May non-farm payrolls report is still likely to see a decent increase in hiring with around 655,000 jobs set to be added, while the unemployment rate is expected to slip back to 5.9%, after unexpectedly rising to 6.1% in April, due to a surprise rise in the participation rate to 61.7%. All things considered yesterday’s US dollar rally suggests an expectation of a strong beat on the headline number, as well as a big upward revision to the April number. Anything less than a big beat on both could well see the US dollar slide back.   

EUR/USD – despite a marginal new high at 1.2266, the euro has once again slid back, however the decline has been limited to the 1.2120 area. A move below 1.2120 opens up the 1.2050 area. The highs this year at 1.2345 remain a key level and barrier.

GBP/USD – the 1.4240 area has continued to cap the pound, however with solid support also at, or just above 1.4000 the bias remains towards the 2018 peaks at 1.4375. A failure to overcome 1.4240 keeps the bias towards 1.4000.   

EUR/GBP – despite a marginal overspill to 0.8670 the euro has slipped back with the bias remaining to the downside and a slide back towards the 0.8560 area on a break below 0.8600. Above 0.8640 opens up the prospect of a move towards the April highs at 0.8730.

USD/JPY – still in the overall uptrend from the January lows at 108.60, moving up through resistance at the 110.20 area, with the potential for a move towards 111.00 Bias remains to the upside while above the 108.60 area.

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