Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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US jobs report strong, but dollar reaction could be mixed
John J. Hardy
Chief Macro Strategist
The US jobs report was strong on all fronts. The payrolls growth was +223,000 versus less than 200,000 expected and the net revisions to the prior two months’ data was in at +15,000. Most importantly, on the average hourly earnings front, earnings bumped +0.3% higher month-on-month versus +0.2% expected and a disappointing +0.1% in April and this took the year-on-year figure to +2.7% vs. 2.6% expected.
This should have the market more fully pricing back in that June 13 Federal Open Market Committee rate hike that was beginning to look like slightly less of a sure thing recently after the recent EU sovereign debt flash crash and some adjustment in the latest Fed language on how it intends to react “symmetrically” to inflation now that the 2% inflation target is coming into view.
The immediate question for traders is what this means for the dollar after several gear shifts recently. For USDJPY, it is positive if rate anticipation heads back higher and especially if the recent reversal in long US rates has proven a false one (the 10-year benchmark, currently at 2.91%, needs to get back above 3.0% and higher in a hurry to indicate this can happen, otherwise, we don’t expect much from USDJPY and see 110.00-25 as the key pivot/resistance area).
Elsewhere, USD support may be a bit sluggish if risk appetite improves and the market starts to pick up interest in pricing rate hike anticipation higher elsewhere as the Fed is seen on a gradual hiking course and set to indicate a desire for more flexibility at the June 13 FOMC meeting (which will initially be read as dovish unless we see several months of more inflationary or strong US data).
Higher US Fed expectations and US yields together with risk off would be the most positive USD scenario.
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