The U.S. jobs report was a major disappointment and the U.S. dollar fell sharply against all of the major currencies in response as 10-year Treasury yields slipped nearly 4%. It turns out, the decline in consumer confidence, lower service and manufacturing ISM employment measures were the most telling leading indicators for non-farm payrolls. Despite widespread reopenings, job creation did not live up to lofty expectations. Payrolls rose by only 559,000 against expectations for a 671,000 increase. This is a solid number by any measure, but investors can say goodbye to taper talk in June. With two subpar job reports, the Federal Reserve, which meets later this month, has the perfect excuse to avoid talking about reducing asset purchases. There’s significant division within the central bank on how to manage inflation. Fed President Patrick Harker says it is time to think about tapering, but Fed President Loretta Mester thinks more progress needs to be made on the labor market. Both are non-voting members of the FOMC this year.
The rise in stocks, sell-off in the U.S. dollar and Treasury yields tell a consistent story of low interest rates. While investors are disappointed by the overall number of jobs created, the labor market is moving in the right direction, which is positive for stocks. The unemployment rate also fell to 5.8% from 6.1%, while average hourly earnings growth accelerated by 0.5%, which was stronger than expected. A steady recovery combined with little imminent threat of taper talk is negative for the U.S. dollar and positive for risk currencies. With the Federal Reserve in its pre-FOMC quiet period next week, the U.S. dollar should remain under pressure against most of the major currencies.
U.S. dollar weakness drove the Canadian dollar higher despite another month of job losses in Canada. Economists were looking for Canadian employment to fall by 20,000 in May, but the decrease was three times more than expected. Full- and part-time employment declined, driving the unemployment rate up to 8.2% from 8.1%. The good news was that job losses were less than the previous month, and with the country poised to ease restrictions in June, jobs will return in the third quarter. Manufacturing activity also grew at a faster pace, with the IVEY PMI index rising to 64.7 from 60.6. The Bank of Canada meets next week, and it is widely expected to keep policy on hold after reducing asset purchases in April. As it could taper asset purchases again in the third quarter, its outlook could be less dovish than other central banks.
Next week will be a busy one for the euro, with a European Central Bank monetary policy announcement, German ZEW and industrial production report scheduled for release.