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MARKETS

Global stocks took a nosedive from their all-time high on Friday after unexpectedly strong U.S. monthly jobs data crushed hopes for imminent Federal Reserve rate cuts, which the eurozone and Canada had already embraced. Treasury yields shot up faster than a caffeinated jackrabbit.

Traders were utterly baffled when the world's largest economy added 272,000 jobs last month, blowing past the economists' forecast of 185,000. This derailed the prevailing belief that the labour market had cooled just enough to ease consumer prices. It was a plot twist worthy of attention, especially after weeks of tier 2 employment-related data pointed toward a labour market slowdown.

For the past few months, alternative jobs data has hinted at a deceleration, giving the rate-cut enthusiasts something to cling to. They were hopeful this slowdown would make an encore appearance in Friday’s critical NFP headline data. While April seemed to align with this storyline, May had other plans. The barnburner U.S. jobs report sent global risk markets into a tailspin, flipping the rate cut script on its head and leaving everyone scrambling to make sense of yet another economic reality check.

In the days leading up to the release, a series of reports—including another drop in job openings, a mixed read on ADP private hiring, and an uptick in jobless claims—suggested the labour market was cooling off. Well, you can toss that narrative in the dustbin for now.

Thanks to the big overshoot in May’s headline, the three-month moving average for NFP climbed from April to 249,000.

The household survey showed a whopping drop of 408,000 employment levels, the second-largest decline since the pandemic-triggered jobs apocalypse.

But don’t start hoarding canned goods just yet! Divergences between the household and establishment surveys are about as common as cats on the internet. While some naysayers might wave this disparity around like a doomsday flag, history tells a different story. These disagreements don’t usually foreshadow downward revisions to the NFP headlines. So, let’s keep the panic buttons unpressed for now.

Traders (and Fed officials) will find it challenging to overlook the significant overshoot on the headline and the robust wage readings. Expect the market to backtrack on those Fed rate-cut bets ahead of the US CPI and next week's Fed meeting.

FOREX MARKETS

The short dollar trade has been a rollercoaster ride for the past two months, and Friday was no exception. The U.S. dollar staged a strong rebound following a data release indicating that the American economy added significantly more jobs than anticipated last month. This unexpected development suggested that the Federal Reserve might postpone its plans to initiate an easing cycle this year.

The dollar index measures the dollar's strength against a basket of six major currencies, including the euro, surged by 0.8% to reach 104.91. This marked its most substantial daily gain since April 10. Consequently, it was a disappointing outcome for traders who had recently entered into short positions on the U.S. dollar, as their bets failed to materialize as anticipated.

In summary, the U.S. payrolls report underscored a more prolonged and challenging journey towards potential rate cuts in the U.S., prompting reversion traders like myself to revisit our strategies and adapt accordingly. It's a reminder that risk management, flexibility and resilience are essential virtues in the dynamic trading world.

The silver lining? Mondays always offer a fresh start, like the sun breaking through the clouds after a stormy weekend. Although last week's profits may not have soared as high as anticipated, we're currently at favourable levels to re-enter the market fray—if you feel bold enough to seize the opportunity.

OIL MARKETS

Midweek Crude oil prices rallied in hopes that OPEC might alter its production policy after the group dismissed the market’s bearish reaction to its decision to phase out voluntary cuts, stating that it retains the option to pause or reverse production changes if necessary. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, emphasized the alliance's commitment to market stability and its ability to react quickly to changes.

This news hit the market when it was already in oversold conditions, leading to a swift rebound. To call this anything but market manipulation would be an understatement. OPEC might be a self-serving entity, but it's undeniably tradable.

On Friday, all ships seemed to sink as optimism about US rate cuts faded. Oil prices, which had been climbing earlier in the week, fell from their intra-week highs. Paradoxically, strong US jobs numbers were perceived as negative for oil demand, contributing to the downward pressure on prices.

THE DEBATE RAGES ON

The debate over the U.S. labour market's direction remains unresolved following the mixed signals from the May employment data. The Establishment Survey presented a robust picture with a headline job gain of 272,000, significantly exceeding the revised April figure of 165,000 and surpassing all economist estimates on Bloomberg. This strong performance boosted the second quarter's monthly average job gains to 219,000, not far behind the first quarter's 267,000 average. This rate of job creation remains "too hot" for the Federal Open Market Committee's (FOMC) preference as it struggles to control inflation.

Compounding the Fed's concerns, average hourly earnings increased by 0.4% in May, higher than anticipated, raising the year-on-year growth rate to 4.1% from the revised 4.0% of April. This wage growth indicates persistent inflationary pressures within the labour market.

Sector-wise, job growth was seen across most major goods and service sectors: government (+43,000), leisure and hospitality (+42,000), professional and business services (+33,000), construction (+21,000), finance (+10,000), and manufacturing (+8,000). Education and health care (+86,000) and trade and transportation (+27,000) also showed solid gains, although temporary help services experienced a decline (-14,000).

In stark contrast, the Household Survey painted a picture of a cooling labour market. It reported a significant drop in employment by 408,000 and a labour force reduction of 250,000, pushing the unemployment rate to a new cycle high of 4.0%. The Household Survey has recorded net job losses in four of the last six months. Additionally, the average duration of unemployment rose to 21.2 weeks from 19.9 weeks in April, indicating increased difficulty in finding new employment. The participation rate also fell to 62.5%, and the average weekly hours worked remained steady at a low of 34.3 hours.

Bottom Line:

The mixed signals from the May employment data leave the economic and inflation outlook ambiguous, requiring more decisive information for a clear direction. The bond market has reacted strongly to the headline payroll number, leading to pushback on rate cut expectations and a rise in Treasury yields across the curve. The 2-year yield has increased by 12 basis points and the 10-year yield by 13 basis points. Fed funds futures reflect a 55% probability of a rate cut by September, down from 83% the previous day. The conflicting data emphasizes next week's CPI inflation figures and how the Federal Reserve, under Chair Jay Powell, will integrate these insights into their policy decisions at the upcoming FOMC meeting.

CHART OF THE WEEK

The World Gets Acid Reflux From China Exports

The tension surrounding electric vehicles (EVs) is palpable, especially as car exports hit near-record highs last month, prompting concerns and potential tariff responses from Europe and the US. This surge in exports, driven by a booming appliance market, particularly in China, underscores a broader issue: the property crisis gripping the nation. With home purchases dwindling, the demand for appliances and building materials has waned, leading to exporters slashing prices in a bid to maintain sales volumes. This trend isn't limited to appliances; it extends across various sectors, including steel and construction equipment. The fallout from China's property crisis is reverberating through global markets, leaving exporters scrambling to adapt to shifting demand dynamics.

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