Sentiment was already positive before the release of the US jobs report as Italian bond yields were lower for the third day due to diminished political concerns following the formation of a coalition government there. When the US jobs report was published, this triggered a fresh rally in risk-sensitive assets as investors were relieved to learn the jobs market remained healthy after two months of poor showing. Headline non-farm payrolls come out well ahead of expectations at 223,000 while the unemployment rate fell further to just 3.9%. Meanwhile the average hourly earnings index climbed by 0.3% on the month, which was also higher than expected. Today’s other US macro pointers, including the ISM services PMI and its components and construction spending, all beat expectations, too.
USD/JPY leads charge but other dollar pairs muted response
The risk-on trade helped to fuel a sharp rally in the USD/JPY, although other dollar pairs moved more hesitantly. This may be in part because the dollar was already up sharply in the hour leading up to the publication of the jobs report. Donald Trump’s tweet about him looking forward to seeing the NFP data had prompted speculation that the figures will beat expectations.
But given the lack of a more significant response to the stronger data it remains to be seen if the dollar will be able to extend its gains further next week. The somewhat muted reaction in the likes of the GBP/USD and AUD/USD despite today’s strong set of US macro figures is not a good sign for dollar bulls. However we won’t jump into any conclusions ahead of the weekend. What’s more, the dollar looks overbought in the short-term anyway, so it is understandable why some speculators might approach it cautiously.
Fed could hike rates more aggressively
Regardless of the market’s reaction, today’s key data releases from the US is consistent with the improvement we have been accustomed to of late. The overshoot of full employment should lead to higher wage inflation in the months ahead, which in turn may encourage the Fed to raise rates more aggressively. A rate hike in June looks almost certain and there may be one or possibly two further rate hikes in the second half of the year. If rate hike expectations rise sharply again then this may actually undermine the appetite for equities again. So, we will take today’s Wall Street rally with a pinch of salt.
Italian jitters could come back; trade war concerns linger
Meanwhile the Italian situation may have calmed down for now, but the new administration could be on a collision course with the EU. So tensions could flare up again soon. That being said, the political uncertainties typically don’t have a lasting impact. After all, neither Trump’s election victory nor Brexit could stop the markets from hitting record highs. But the bigger concern is the developing trade war. The US tariffs on EU metal exports could hit demand for German cars, for example. Retaliation from the EU, Mexico and Canada could likewise hurt US exports of key goods.
Quieter economic calendar next week
There’s not much in the way of key data next week, but will still have a rate decision from the Reserve Bank of Australia and UK services PMI on Tuesday, while Canadian employment figures will be published on Friday. As far as the RBA is concerned, well it looks like it won’t have much of a decision to make and policy will mostly likely be kept unchanged for a record 20th month. Inflation and wages remain stubbornly low, so it could be a while before the RBA turns hawkish.