04 June 2021

Will US NFP Help the Fed Decide on Bond Buying?

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News shaping
the markets today

     

What’s happening: The US Bureau of Labor Statistics is all set to report the jobs data for May today, at 0830 ET (1230 GMT).

What happened: Following disappointing figures for April, experts are projecting sharp growth in nonfarm payroll (NFP) numbers for May.

Last month’s payrolls report will be carefully monitored by the Federal Reserve and will set the stage for the central bank’s June meeting for discussions around the tapering of its asset purchase program.

Why it matters: Projections for April were very high, due to expectations of a strong economic rebound and the normalisation of labour markets. The report was seen as a major setback, raising concerns around labour shortages impacting the overall market recovery.

Although strong headline figures for May will be a signal of a healthy economic rebound, investors are concerned about higher inflation resulting in the Fed raising interest rates.

The Federal Reserve has been purchasing Treasury and mortgage securities worth around $120 billion every month to ease the impact of the pandemic on the economy. With signs of a rebound, the central bank has been in talks to scale bank asset purchases. Any move to pause bond buying is widely seen by the markets as an initial step to the Fed beginning to raise interest rates.

“May jobs data will be a key factor in determining the path of Fed policy in coming months…However, a stronger increase (+1 million) would keep the June FOMC meeting on the table for a possible signal ‘well ahead’ of tapering later this year,” said Citigroup economists.

The jobs report for May comes after strong signs for the labour market last month, following weaker-than-expected data for April. Initial jobless claims fell below 400,000 for the first time since March 2020 to 385,000 last week. The ADP (Automatic Data Processing) also reported that its private sector payrolls increased by 978,000 last month, surpassing the consensus estimate of 680,000.

“I think the biggest surprise would be a disappointment…The market is clearly leaning toward a strong consensus print,” said BMO analyst Ian Lyngen.

What are estimates: Analysts expect jobs growth for May to be more than double the figure reported for April.

  • Around 671,000 jobs are expected to be added in May, compared to 266,000 in April.
  • The unemployment rate is expected to decline to 5.9%, from 6.1% in the previous month.
  • Economists expect average hourly wages to rise by 0.2%.

What to watch: The US jobs report has a significant impact on the global forex and equity markets. With the US dollar index declining to February levels, giving back gains recorded in March and April, traders look forward to a rebound in case of a strong jobs report. Wall Street remains cautious ahead of the NFP report, with Dow futures trading almost flat this morning.

The Markets Today

     

The Canadian dollar will be in focus today, ahead of the key jobs report from the country.

Context: The Canadian dollar traded lower, dropping to a six-day low versus the US dollar on Thursday.

Details: The loonie has recorded a sharp rise so far this year, driven by higher commodity prices and a more hawkish stance from the country’s central bank.

However, the US released encouraging economic reports on Thursday, which reinstated signs that the biggest economy in the world was on course to rebound from the pandemic.

The US dollar index, which tracks the greenback’s movement versus a basket of six major rivals, climbed on Thursday, after data showed a further decline in initial jobless claims and a higher-than-projected rise in private sector employment in May.

A sharp recovery in the US economy also raised concerns around a hike in the Fed’s interest rates.

Prices for crude oil, one of Canada’s major exports, hit its strongest level since October 2018 of $69.40 per barrel on Thursday, but finally settled lower by 2 cents, at $68.81 per barrel.

The CAD/USD forex pair settled lower by 0.6% at 1.2107 on Thursday, notching its highest decline since April 20. The currency had tumbled to its lowest intraday level of 1.2120 last Friday.

Some of Canada’s provinces were in lockdown during April to curb the spread of the third wave of the pandemic. However, the Bank of Canada is still expected to scale back its bond purchase program next quarter, driven by prospects of a sharp economic rebound.

What to watch: Traders await Canada’s jobs report and Ivey Purchasing Managers Index. The unemployment rate in the country is expected to rise to 8.2% in May, from 8.1% in April, while the Canadian economy is expected to shed 20,000 jobs in May, after losing 207,000 jobs in the previous month. The Ivey Purchasing Managers Index, which fell to 60.6 in April, is expected to rebound to 65 in May.

The covid-19 pandemic remains one of the top concerns for markets, with total global infections topping 172 million.

Other Markets: US indices closed lower on Thursday, with the Dow Jones index, S&P 500 and Nasdaq 100 down by 0.07%, 0.36% and 1.07%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

India’s value of deposits, foreign exchange reserves, value of loans and Reserve Bank of India’s interest rate decision, Eurozone’s construction PMI and retail sales, France’s construction PMI and retail sales, Germany’s construction PMI and new car registration, Italy’s construction PMI, UK’s new car registrations and construction PMI, Mexico's auto exports and car output, Brazil’s services PMI and composite PMI, Russia’s foreign exchange reserves, business confidence, retail trade, real wage growth and gross domestic product as well as America’s factory orders, Baker Hughes crude oil rigs and total vehicle sales.

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