- Dollar continues to slip on slowing unit labor costs
- Investors pull back on their Fed hike bets
- NFPs in the spotlight; earnings must be considered
- Wall Street optimistic about June pause
Dollar Slips as Investors Remove More June Hike Bets
- The US dollar continued its decline on Thursday, losing ground against every major currency and remaining on the downside today as well.
- Investors became uneasy about a June rate hike after dovish remarks by Fed Board Governor Jefferson and Philadelphia Fed President Harker. They both indicated a preference to “skip” the rate hike.
- Furthermore, economic data raised more doubts about raising rates at the upcoming Fed meeting. The ADP report showed that the private sector gained more jobs than expected in May. However, investors paid more attention to the Labor Department report, released just fifteen minutes later, which showed that the price of labor per single unit of output only grew by 4.2% qoq, down from the 6.3% growth rate indicated by the preliminary release on May 4.
- Combined with a slide in the ISM manufacturing PMI, which indicated contraction for the seventh straight month, this wage inflation metric prompted investors to bet on a Fed pause in June. Even a July hike is now doubtful, with only 18bps worth of a hike priced in for that month.
Nonfarm Payrolls on Tap
- Today, traders will evaluate the official US employment report for May, with non-farm payrolls expected to have slowed to 180k. The unemployment rate is expected to tick up to 3.5% from 3.4%, its lowest in over fifty years.
- However, given the ADP results, the risks for the nonfarm payrolls number may be higher than expected. Nevertheless, according to the market’s reaction to the Unit Labor Costs data yesterday, investors may pay more attention to the wage growth numbers. Average hourly earnings are expected to have slowed to 4.3% year-over-year from 4.4%, but with the ADP revealing a pay slowdown and the price subindex of the ISM manufacturing PMI dropping by 9 points, a lower-than-expected earnings growth rate today cannot be ruled out.
- Cooling wages could limit any NFP-related gains in the dollar, and even allow for more selling later in the day. A break below the key support zone of 1.0510 would indicate a bullish reversal for the US dollar, but it seems a dip in euro/dollar is unlikely at this point.
Wall Street Extends Rally on Fed Pause Hopes
- With the probability of the Fed pausing in June increasing and a July hike becoming less likely, some investors bought more stocks yesterday. All three of Wall Street’s main indices closed in the green, with the tech-heavy NASDAQ leading the way. Beyond the increasing Fed pause hopes, some investors are still optimistic about artificial intelligence (AI).
- The debt-ceiling deal, which passed through the Senate during the Asian session today, may still be a factor in the current optimism. However, the deal acts more like a boost pill now, eliminating the risk of a destabilizing economy. A potential liquidity squeeze from Treasury issuance could have the opposite effect.
- The NASDAQ is now nearly 40% up from its October low, which could increase the risk of downside correction in the future.
