U.S. labor market data adds to volatility before the weekend

Sentiment Has Been Driven Lower By An Aggravation In Geopolitical Backdrop

On Friday, May 6, the US Department of Labor released data on employment change in the United States. Investors may have been looking for confirmation from Federal Reserve officials that the US economy is in good shape.


The initial market consensus was for a change in employment in non-farm sectors of less than 400 thousand new jobs, which would be the lowest NFP reading this year. Meanwhile, the publication seems to have surprised on the positive side as the US economy added 428k new jobs in the previous month. The gain was widespread, with the largest increases in leisure and hospitality, manufacturing, and transportation and warehousing.


The U.S. unemployment rate remained at 3.6 percent in April and the number of unemployed remained unchanged at 5.9 million. These rates are little different from the February 2020 values. (3.5 percent and 5.7 million, respectively), before the coronavirus pandemic (COVID-19).


Thus, the U.S. economy already appears to be returning to full employment. What may be disappointing is the smaller increase in average hourly earnings, which rose by 0.3 percent on a monthly basis, against market expectations of 0.4 percent. Wage growth may be important for high inflation. The lower it is, the real purchasing power of Americans may fall, and this may cause economic trouble by reducing consumption.


Financial markets seemed to react optimistically after the NFP publication. Contracts on the American index S&P 500 rose to the session maximum at 4157 points. However, a moment later the quotations seemed to fall below 4130 points. Yields on US 10-year bonds set another local peak, exceeding the level of 3.11%, which in turn may show that good data from the USA confirm the Fed's directions and may bring closer the rapid tightening of monetary policy. The market seems to be pricing in a peak of interest rate hikes in the region of 3.5-3.75 percent. Hence, with yields at 3.11 percent, the full discount of Fed actions may be close.


In such a situation, it is not out of the question that the US dollar or stock market indices may also be getting closer to certain inflection points. The U.S. dollar is at its most expensive in 22 years (USD index), while the Nasdaq 100 has already fallen 24 percent from its peak. The last time such a large correction, other than the Covid hit the financial markets when the Nasdaq 100 was down 32 percent, was in 2018. Back then, the index's decline was 24.69 percent.


Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)

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Sentiment Has Been Driven Lower By An Aggravation In Geopolitical Backdrop

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