The US jobs data was much weaker than expected with the increase in payrolls substantially below expectations.

The US jobs data was much weaker than expected with the increase in payrolls substantially below expectations. Given the huge miss, market reaction to the data was inevitably strong.

US yields moved lower on expectations that the Fed would remain extremely accommodative for longer. Wall Street indices posted fresh record highs amid expectations of a loose monetary policy. Global bourses also made gains, although Chinese stocks edged lower.

The dollar dipped sharply and hit 2-month lows as yields moved lower and Fed expectations shifted. EURUSD hit 2-month highs above 1.2150. Sterling gained some relief that the SNP failed to win an outright majority in Scotland with GBP/USD above 1.4000.

Commodity currencies strengthened as the US dollar weakened and commodity prices posted strong gains.

There was a very big miss on the headline US employment report with the increase in April  non-farm payrolls held to 266,000 for April compared with consensus forecasts of an increase close to 980,000. The March increase was also revised down to 770,000 from the original figure of 916,000. Private-sector payrolls increased 218,000 on the month after a 708,000 gain previously. There was a decline in manufacturing jobs of 18,000 for the month while construction jobs were unchanged. There were also declines in transport and professional services jobs on the month with major surprise over the data.

There were some suspicions that there were problems with seasonal adjustment for the data given that the survey evidence has consistently indicated that job creation has been strong over the past few weeks.

Unemployment increased to 6.1% from 6.0% and compared with market expectations of a decline to 5.8% as the participation rate increased slightly. The household survey recorded an increase of 328,000 in the number of employed as the participation rate edged higher.

The dollar dipped sharply lower following the data with the index at 2-month lows while EUR/USD pushed to highs near 1.2150.

Given that the Federal Reserve has focussed strongly on securing maximum employment, the data will maintain expectations that the central bank will maintain an aggressive monetary policy. In this environment, the dollar was unable to regain ground and remained under pressure into the New York close. The dollar remained near 2-month lows on Monday as underlying sentiment remained weaker. Commodity currencies posted gains with a slight EUR/USD correction to just above 1.2150 from 1.2175 highs.

US bond yields moved sharply lower following the US employment report and the US currency also initially declined sharply with a USD/JPY slide to below 108.50.

Wall Street indices reacted positively while there were mixed trends in Treasuries later in the session. The 10-year yield recovered to trade little changed on the day, although the 5-year yields remained lower and USD/JPY settled around 108.60 amid wider US losses.

Over the weekend, Minneapolis Fed President Kashkari stated that the US labour market remains in a deep hole and needs aggressive support with the Fed doing everything it can to accelerate the job-market recovery. Investment banks also noted that the US data could have an important impact in delaying a tapering of bond purchases by the Fed.

Risk appetite strengthened on Monday which dampened yen demand and the Japanese currency was also hurt by gains in commodity prices. USD/JPY posted net gains to around 108.85 as demand for the Japanese currency faded while EUR/JPY traded above 132.0 and near 31-month highs.

Sterling held a firm tone ahead of Friday’s New York open. Given that there was caution ahead of the US employment report, the main focus was political with a strong performance by the Conservative Party providing an element of currency support. The UK PMI construction index declined marginally to 61.6 for April from 61.7 and slightly below consensus forecasts, although there was a surge in new orders and there was further strong upward pressure on costs amid supply-chain shortages.

Bank of England Deputy Governor Broadbent stated that the downside risks are less pronounced, but reiterated that evidence of a sustainable return of inflation to target was needed before starting to remove policy accommodation. GBP/USD traded close to 1.3900 ahead of the US jobs data before a jump to highs around 1.3970 as the US dollar dipped following the data. With the dollar remaining under pressure, GBP/USD tested 1.40 in late trading while GBP/EUR settled just above 1.1500.

The pro-independence parties secured a majority in the Scottish parliamentary elections, but the SNP fell just short of an overall majority while the Conservative Party made net gains in England. The Scottish independence issue was seen as important over the longer-term, but potentially in the background in the very short term which provided net relief for the Pound and could trigger a fresh increase in long positions as markets focus on economic recovery.

Economic Calendar