Risky assets largely well supported after strong US data - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that the combination of a decent US labour market report for March and the widely held view that Fed Chair Yellen is strongly biased towards maintaining a cautiously dovish position on policy has kept risky assets largely well supported, despite the softer oil price. 



“The change in non-farm payrolls for March was reported as a moderately stronger than expected 215K, with the revisions for the previous two months posting an uncharacteristically small -1K drop. Thus far this year payrolls growth has averaged 209K. Although this is lower than the 229K and 245K averages posted for 2015 and 2014 respectively, the persistent nature of the improvement combined with the substantial strengthening in the length of the work week since 2009 describes a robust US jobs market.

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Unsurprisingly the better tone is attracting more people into the workforce with the rise in participation resulting in a rise in the unemployment rate to 5% in March. Despite the solid report, there are some signs of plateauing in the pace of improvement in the payrolls gain and in the length of the working week. Hours worked in March rose by 0.2% m/m after the big -0.4% m/m drop in February. That said, average hourly earnings managed a better than expected 0.3% m/m gain.

There is a widely held belief in the market that Yellen would prefer an overshoot in inflation rather than risk tightening monetary policy settings too soon. This belief is drawn from the asymmetric position of policy settings, with there being far more upside room for manoeuvre on interest rates if inflation were to shoot beyond the 2% level. Some of Yellen’s dovishness appears to have rubbed off on the Fed’s Mester who was once considered a hawkish member of the FOMC. Mester appears to be establishing a position on the fence with her remarks that she voted with the majority in March although she understands the arguments for hiking.

The payrolls data was not the only encouraging report on Friday. US ISM manufacturing data recorded a better than expected result at 51.8. Chinese manufacturing PMI data on Friday were also better than expected.”