Risk assets resume their rise as dollar suffers following payrolls miss

Last Friday, investors across the world were cautiously monitoring the US nonfarm payrolls report, as many market participants were anticipating a seven-digit job gain.  Unfortunately, they got a negative shock as US employers hired a quarter of the expected figure, with the headline of only 266,000 in April.

Over the past several weeks, a lot of economic data has surprised to the upside, including figures on consumer spending, business and consumer confidence, the housing market and manufacturing and services activity. That had led some economists to anticipate far more than a one million jobs to have been added. Indeed, if we exclude March 2020, this was the worst negative surprise in 24 years since the survey started.

While the trajectory continues to show improvement in the labour market, the US may not return to full employment by next year if the jobs recovery starts to show fragility. For investors, this is not necessarily bad news. In fact, it should be seen as positive for risk assets and negative for the US currency.

The US 10-year breakeven rate serves as an indication of the markets’ inflation expectations over the 10- year horizon and this reached a new eight year high of 2.49%. The latest spike in inflation expectations is now driven by two factors, the big surge in commodity prices and expectations of extended easy monetary policy. The Fed is now set to delay tapering of its asset purchases until the end of the year instead of the third quarter and that is why the S&P 500 and Dow Jones Industrial Average closed at new record highs despite the gloomy jobs report.  The next big data point will be released on Wednesday with US inflation expected to have soared 3.6% compared to a year ago. However, this is due to base effects which means investors should monitor monthly changes instead to see if there are any signs of prices moving sharply higher. 

When looking at base metals, prices are running hot with iron ore and copper continuing to record new highs. This should further benefit stocks in the mining industry, but also raises some doubts over the Federal Reserve statements which say inflation will be “transitory”.

Asian stocks rose today on expectations of lower rates for longer with European and US indices are also set for a positive start to the week.  Meanwhile, the dollar continues to feel the pain from Friday’s disappointing jobs report with the dollar index (DXY) only 0.3% higher from where it started the year, having retreated 3.45% from the March peak.

Given the current environment, expect the selling of the DXY to resume with the first big test around 89.20. A break below this level will send the greenback to a three-year low. Unless we see a sharp correction in equities or a new surge in US bond yields, expect the dollar to remain under considerable pressure.