Kiss June Fed Hike Goodbye

thenews 2016.05.08 07:53

You can kiss a June Federal Reserve rate hike goodbye after Friday’s nonfarm payrolls report. The U.S. economy added the fewest jobs in 7 months, leaving the unemployment rate at 5%. Investors had been hoping for the jobless rate to improve and payrolls to fall modestly but the 40K miss and the downward revision to last month’s report completely overshadowed steady earnings growth. Earnings are important but in order for the dollar to rise, we needed to see an unambiguously positive labor-market report -- unfortunately that didn't happen. At the same time, while the chance of a June rate hike collapsed, the dollar did not because the NFP report was released in an environment of dollar strength and most investors were positioned for a weak number.

Can the dollar still rise in the coming week? Yes, because the steady 0.3% increase in earnings and the uptick in year-over-year wage growth provides hope that retail sales, which fell sharply in March, will rebound strongly in April. However after this week’s strong gains, particularly against the commodity currencies, some type of a correction in the greenback would not be unusual. Either way, we still view 107.50-108 as an attractive area to sell USD/JPY.

After some initial post-NFP volatility, euro traded slightly higher versus the U.S. dollar. Eurozone first-quarter GDP numbers are scheduled for release next week, but the market’s appetite for U.S. dollars will continue to have a meaningful impact on EUR/USD. GDP growth is expected to accelerate but given the sharp drop in German retail sales, we believe the risk is to the downside for next Friday’s GDP. Early next week we have German industrial production and trade numbers scheduled for release.

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