So the U.S. rolled out its much-awaited NFP figure last Friday, and boy was it bad. No, actually, it was downright HORRIBLE.
According to the May non-farm payroll (NFP) report, the labor market only gained 69,000 jobs last month, a far cry from the increase of 150,000 that most were expecting. To make matters worse, the 115,000 jobs that were supposedly created in April was revised down to just 77,000.
These weak gains contributed to a rise in the unemployment rate (the first in over a year!), bringing it up from 8.1% to 8.2%. Meanwhile, average hourly earnings grew slower than forecast as it rose by just 0.1% and not 0.2%.
Risk aversion was the name of the game once the markets caught sight of the disappointing jobs data. Equity markets sold off after the report's release, with the Dow Jones Index plunging 2.2%. And on the receiving end of the safe haven flows was the dollar, which rallied strongly against other major currencies.
But once the dollar-buying frenzy died down, the tables turned in favor of the dollar bears. Within an hour of its release, the markets realized that the weak NFP figure was actually dollar-negative, and so they began to unload their long dollar positions.
The poor jobs data stoked QE3 speculation in the market. Vincent Reinhart, Morgan Stanley's chief economists, said that slowing employment growth, the deteriorating situation in the euro zone, and the worsening assessment of U.S. politicians' capability to steer clear of the impending fiscal cliff makes it likely that the Fed will further revise down its already glum forecast.
Michelle Mayer, a Bank of America economist, shared the exact same sentiment. She said that if the economy continues to slow and fall to a GDP growth of 1% by the fourth quarter, quantitative easing is inevitable. The Federal Reserve, according to her, cannot simply sit on its hands. By August or even September, data could be weak enough to prompt the Fed to take action despite the elections.
Quantitative Easing and the Dollar
Quantitative easing is a central bank's method of increasing money supply by printing new money and purchasing government bonds. The higher money supply encourages the government to spend, and thus stimulate economic activity.
Despite its growth aims, QE is usually considered by traders as bearish for the domestic currency. Because QE increases the money in circulation, traders believe that it will devalue the currency and give rise to inflationary concerns.
For now, it appears that the dollar is starting to give back its gains. But whether the move is a true reversal or simply a minor retracement still remains to be seen. In any case, you should be extremely careful trading in the next few days!
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- NFP Review: More Reason for QE? 05:50 11 October 2010