The NFP report showed a 559k increase last month after a revised gain of 278k in April, below the 650k expected, while the unemployment rate fell to 5.8% versus 5.9% expected.
The average hourly earnings rose to 0.5% in May compared to the 0.2% expected.
How did these economic results impact the markets?
All these results can be considered positive by assuming a reduction in the unemployment rate, the main objective of the Federal Reserve's monetary policy, and the increase in NFP figures up to 559k.
But the immediate market reaction was disappointing due to higher expectations than those indicated by the average forecasts. Although the non-farm payroll figure was somewhat below the forecast, it was still close enough if the upward revision of the last number would be taken into account.
Also, the average hourly earnings soaring for the second consecutive month was a good omen. This component is essential for assessing potential inflationary pressures, so the Federal Reserve closely watches it. In summary, although the figure did not represent a considerable increase compared to what was expected, it could pave the path of recovery, pushing the Fed to adjust interest rates and its monetary policy.
The G7 meeting outcome.
The Secretary of the Treasury, Yellen, hinted at this weekend’s G7 Meeting that normalization of interest rates would be desirable at higher levels. With data similar to those published on Friday indicating progress in the labour market and with inflation indicators such as average hourly earnings on the rise, expectations of rate hikes and reductions in asset purchases could continue to be in the investors’ attention.
Inflationary pressures could also worsen soon if the prices of raw materials remain at high levels. This has directly influenced the Chinese trade balance data published today, showing a notable increase in imports from the Asian country up to 51.1% from 43.1% the previous month. Such a result was attributed to the recovery of the Chinese economy and the increase in the cost of its imports that could lead to higher production costs and, therefore, to exported inflation. It must be remembered that until now, the opposite phenomenon had occurred, with China exporting deflation to the rest of the world.
The market reacted without taking into account all these inflationary signs. The yield on the 10-year bond fell to 1.55% from 1.63%. At the beginning of today’s session, the yield recovered some of its lost territory and rallied to 1.58%. The same happened with the U.S. Dollar – it strengthened again after going down.
EUR/USD rose around 70 pips to 1.2180 and retraced today to the 1.2160 area. This week’s ECB meeting and the U.S. CPI data will be important – a consumer price index report data indicating continuity in the price rises could have a more relevant positive effect on the U.S. Dollar and the U.S. Treasury Bond Yields.
Sources: investing.com, reuters.com.
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