European session – Jobs number beats estimates but boost to dollar proves short-lived

Michalis Florentiades, XM Investment Research Desk

The release of much better-than-expected jobs figures for June out of the United States put to rest fears that May’s weak report was the beginning of a serious slowdown in the US labor market.  The net number of nonfarm jobs created reached 287 thousand during June against economists’ estimates of just 175 thousand.  However, the previous month’s figure was revised down to 11 thousand from the original 38 thousand announcement.  Unemployment climbed to 4.9% compared to the previous month’s 4.7%, but this appeared to be due to the increase in the workforce participation rate (from 62.6% to 62.7%) and not to firings of existing workers.  Wage growth was slower-than-expected at 0.1% against 0.2% expected and previous.

Despite the positive news, the US dollar saw only a temporary boost from the numbers as initial substantial gains quickly evaporated.  This might have been due to the realization that despite the upbeat picture of the US labor market, the Federal Reserve would probably still remain cautious and maintain rates at the 0.25-0.50% target range that has been in place since December.  As Fed speakers have been giving a cautious message with respect to rate hikes lately, the market was reluctant to push the dollar much higher solely on the back of the strong labor report.

Euro / dollar traded as low as 1.1001 in the immediate aftermath of the announcement and dollar / yen rose to 101.26.  However, both rates soon returned close to where they traded before the release of the report – around 1.1050 for euro / dollar and 100.64 for dollar / yen.  The euro was also hurt by a downbeat assessment of the Eurozone region by the International Monetary Fund.

Risk assets were helped by the news as investors saw a potential combination of loose monetary policy and positive economic performance in the world’s largest economy supporting the bullish case for stocks.  The Dow Jones 30 erased all its post-Brexit losses today and was just 300 points away from its all-time high.

The pound appeared to be steadying in the 1.29-1.30 range versus the US dollar.  Earlier in the day, data showed a smaller-than-expected trade deficit for UK during May.  Trade data for Germany on the other hand disappointed, as exports fell 1.8% instead of rising 0.4% as expected by economists.

US oil futures were stable around 45.60 dollars per barrel following the previous day’s rout.  Gold traded in a wide range following the employment report but ended around the 1355 dollars an ounce level.

Over the weekend, markets will be watching out for Chinese inflation numbers for June coming out on Sunday.