“There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man’s fears, and the summit of his knowledge. This is the dimension of imagination. It is an area which we call ... The Twilight Zone.”
Traders no doubt feel like they’re in the Twilight Zone today. After all, it’s an NFP Thursday due to the US holiday tomorrow, and more bizarrely, the Non-Farm Payrolls report is arguably not the most important factor driving trade today; that privilege belongs to the ongoing wrangling ahead Sunday’s Greek bailout referendum.
In classic Twilight Zone fashion, the June NFP reading seemed innocuous enough, printing at 223k vs. expectations of 231k, but all was not necessarily as it appeared. Looking under the hood revealed a couple of blemishes on the seemingly solid headline reading; namely, the quality of the jobs was not particularly strong, with average hourly earnings unchanged m/m (vs. expectations of a 0.2% m/m rise) and revisions subtracted 60k jobs from the previous two months’ readings. The unemployment rate did tick down two-tenths to 5.3%, but it was a “bad” decrease in unemployment, driven by a decrease in the labor force participation rate to 62.6%, the lowest reading since 1977.
While the US economy continues to chug along, the big takeaway from today’s NFP report is that there is still plenty of slack in the labor market. The fact that average hourly earnings were unchanged, despite the unemployment rate falling to 5.3%, indicates that workers still have minimal bargaining power and in turn, that inflationary pressures may be further away than previously thought. Given the lack of price pressures in today’s report, traders have continued to push back their interest rate hike expectations from the Federal Reserve, with Fed Funds Futures now pricing in just a 10% chance of a rate hike in September.
Market Reaction
The market reaction was mostly as expected, if relatively subdued. The US dollar dropped by about 50 pips across the board, with EURUSD testing up to 1.1100, USDJPY pulling back toward 123.00, and NZDUSD recovering the .6700 handle. US equities are pointing to a slightly higher open, while the benchmark 10-year US bond yield quickly shed 8bps down to 2.38% as of writing. Both gold and oil caught a small bid on the weaker dollar.
Unfortunately for volatility-driven traders, the market may now calm down as US traders duck out for tomorrow’s Independence Day holiday and European traders look ahead to Sunday’s Greek bailout referendum.
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.
Recommended Content
Editors’ Picks
AUD/USD stays directed toward 0.6500 as RBA's Bullock speaks
AUD/USD is extending losses toward 0.6500 in Asian trading on Tuesday. The Aussie Dollar remains offered after the Reserve Bank of Australia extended the pause. Markets digest the less hawkish policy statement while Governor Bullock's press conference gets underway.
USD/JPY recaptures 150.00 after the expected BoJ rate hike
USD/JPY extends gains to regain 150.00, as the Japanese Yen stays vulnerable amid a classic 'sell the fact' trading on the hawkish BoJ decision. The BoJ lifted the interest rate by 10 basis points (bps) from -0.1% to 0% for the first time since 2007 and abandoned the YCC framework.
Gold price hangs near one-week low, looks to Fed decision on Wednesday for fresh impetus
Gold price struggles to capitalize on the previous day's bounce from the $2,145 region and oscillates in a range during the Asian session on Tuesday. Hawkish Fed expectations, elevated US bond yields and a bullish USD cap the upside.
Bitcoin price shows weakness, but new BTC whales have created solid support at $56,400
Bitcoin price downside momentum continues to gain strength, giving sidelined and late bulls a chance to buy the dip. The market remains focussed on the oncoming halving, expected to kick off the next bull cycle.
Lots of tension ahead of this week's Fed decision
Last week, we got a strong round of US economic data accompanied by hotter US inflation reads. The takeaway of course is that there might be a lot more pressure on the Fed to be looking to scale back its rate cut outlook at this week’s meeting.