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U.S. employment likely rose again in April, but a rush of job seekers into the labor market should keep wage gains moderate and buy a cautious Federal Reserve more time before raising interest rates again.
Nonfarm payrolls probably increased by 202,000 last month in U.S. Labor Department data due for publication on Friday, after growing by 215,000 in March, according to a Reuters survey of economists.
The unemployment rate is forecast to have held at 5.0 percent as improving labor market conditions lured some previously discouraged job seekers back into the workforce.
Job market strength would reinforce that view that the economy remains healthy, despite growth slowing sharply in the first quarter this year, but the influx of jobseekers may support Federal Reserve Chair Janet Yellen’s argument that there is still some slack in labor market.
“On the margin, the rise in the participation rate probably slows both the growth rate in wages and the Fed, but the reality is that, generally speaking, wage and price inflation has shown some signs of turning and picking up,” said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York.
Average hourly earnings are forecast to rise 0.3 percent in April after a similar gain in March. That would take the year-on-year increase to 2.4 percent from 2.3 percent in March, still below the 3.0 percent advance that economists say is needed for inflation to rise to the Fed’s 2.0 percent target.
The U.S. central bank last month offered a fairly upbeat assessment of the labor market, saying that conditions had “improved further.”
The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade. Fed officials have forecast two more rate hikes for this year.
Market-based measures of Fed policy expectations have virtually priced out an interest rate increase at the Fed’s June 14-15 meeting, according to CME Group’s FedWatch. They see a less than 50 percent probability of rate hikes in September and November, with a 59 percent chance at the December meeting.
SWELLING LABOR FORCE
“I am seeing one rate hike this year and I don’t think it will be in June,” said Dan North, chief economist at Euler Hermes North America in Baltimore.
“While employment growth has been good, there is still quite a bit of slack in the labor market. People are finally coming back in off the sidelines,” he said.
The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, has increased 0.6 percentage points since dipping to 62.4 percent in September and gains have been across all age groups.
About 2.4 million people have entered or re-entered the job market since September last year, the second-largest increase in the labor force over a six-month period on record.
The vast private services sector likely dominated employment gains in April. Manufacturing is expected to have shed another 5,000 jobs last month after losing 29,000 in March, the biggest loss for the sector since December 2009.
Further job losses are likely in mining as the energy sector adjusts to weak profits from a recent prolonged plunge in oil prices. Mining payrolls have decreased by 185,000 jobs since peaking in September 2014, with 75 percent of the losses in support activities.
Construction employment is expected to have slowed after nine straight months of gains, with home building showing some signs of fatigue in April. Retail payrolls are forecast to have also slowed down after averaging 60,433 per month in the first quarter, despite sluggish sales.
The US dollar strengthened against the yen in Asia on Thursday as upbeat US data and speculation of a Japanese intervention helped cement gains from talk of a Federal Reserve interest rate hike next month.
After dipping to an 18-month low around 105.50 yen on Tuesday, the greenback has enjoyed a minor rally in the past two days after two of the US central bank’s regional heads raised the possibility of tighter borrowing costs.
On Thursday, the US dollar was at 107.08 yen, up from 107.03 yen in New York Wednesday. It also rose against the euro, which dipped to US$1.1485 from US$1.1488. The single currency was changing hands at 123.00 yen from 122.96 yen.
Trading was thin with holidays in Japanese markets for most of the week.
“Some investors probably feel that there is an increased possibility of (Japanese) government intervention… and therefore decided to take some of their yen bids off the table,” IG Markets Singapore analyst Bernard Aw said in a note. “This helped (dollar) to strengthen broadly,” he said.
The greenback won support on Tuesday after Atlanta Fed President Dennis Lockhart called a June rate increase “a real option” while San Francisco chief John Williams said he would lend support to a hike if the economy continued on its recovery track.
There had been doubts the Fed would raise interest rates next month after data last week showed consumer spending rose only slightly in April, while the economy grew a lot slower than expected in January-march. A well-below-forecast reading on US manufacturing activity this week compounded the problems.
But figures Wednesday showed an improvement in the key services sector, while new orders for US manufactured goods surged.
However, the US dollar is still struggling against the yen and is almost 13 per cent down from the start of the year, with a shock decision last month by the Bank of Japan not to widen its stimulus ramping up the pressure.
The greenback also rose against most emerging market currencies, putting on almost one per cent against the South Korean won, 0.5 per cent against the Indonesian rupiah and 0.3 per cent versus the Malaysian ringgit.
Sentiment at the close of the US session yesterday was sour as growth concerns re-surfaced after some weaker PMI numbers out of China and the UK yesterday. Overnight data out of New Zealand showed that unemployment rate rose to 5.7% for the first quarter.
Sentiment in Asia remained predominantly negative this morning with much of the major equity indices pointing lower at the time of writing.
Overnight, the dollar eased off a 16-month trough against the other major currencies on Tuesday, as the greenback began to finally recover from last week’s policy decisions by the Bank of Japan and the Federal Reserve, although gains were expected to remain limited.
The USD managed to garner back some of the lost strength after 6 consecutive day’s of losses, while the Yen’s gains seemingly paused – but the Yen appeared on the defensive as the USDJPY held well below 108 levels.
EURUSD is pulling back after peaking to highs of 1.1616 yesterday, highs which we had not seen since August 2015.
Yesterday the AUDUSD suffered a 2.36% setback as the Aussie sold off on the back of the rate cut delivered by the RBA early into yesterday’s session. The RBA cut the policy rate from 2% to 1.75% to counter the threat of deflation.
The decision came a day after the Fed kept interest rates on hold last week and indicated that any future interest rate hikes would be data dependent.
Focus Today Data..
Later today during the european session we have EZ services and composite PMIs, and Retail Sales. In the afternoon the US is expected to have created 195k jobs for the month of April as we await the ADP emplyment change. The ADP is widely considered the precursor of Friday’s NonFarm Payrolls data. From the US Session as well we await the Factory Orders and Duarble Goods Orders.
Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
The theme this morning in Europe remain to sell the USD outright after Fed’s Yellen maintained her dovish stance on monetary policy. The Fed Chairwoman warned “caution in raising rates is especially warranted,” although the comment that broke the camel’s back and led to total loss of faith on the USD was when Yellen said that the “Fed has considerable scope for stimulus if needed.”
Global developments have increased the risks associated with that outlook. In light of these considerations, the Committee decided to leave the stance of policy unchanged in both January and March.
Although the baseline outlook has changed little on balance since December, global developments pose ongoing risks. These risks appear to have contributed to the financial market volatility witnessed both last summer and in recent months.
“The inflation outlook has also become somewhat more uncertain since the turn of the year, in part for reasons related to risks to the outlook for economic growth. To the extent that recent financial market turbulence signals an increased chance of a further slowing of growth abroad, oil prices could resume falling, and the dollar could start rising again. And if foreign developments were to adversely affect the U.S. economy by more than I expect, then the pace of labor market improvement would probably be slower, which would also tend to restrain growth in both wages and prices. But even if such developments were to occur, they would, in my view, only delay the return of inflation to 2 percent, provided that inflation expectations remain anchored.”
“Despite the declines in some indicators of expected inflation, we also need to consider the opposite risk that we are underestimating the speed at which inflation will return to our 2 percent objective. Economic growth here and abroad could turn out to be stronger than expected, and, as the past few weeks have demonstrated, oil prices can rise as well as fall. More generally, economists’ understanding of inflation is far from perfect, and it would not be all that surprising if inflation was to rise more quickly than expected over the next several years. For these reasons, we must continue to monitor incoming wage and price data carefully.”
“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.”
“One must be careful, however, not to overstate the asymmetries affecting monetary policy at the moment. Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy–specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities.”
“As our March decision and the latest revisions to the Summary of Economic Projections demonstrate, the Committee has not embarked on a preset course of tightening. Rather, our actions are data dependent, and the FOMC will adjust policy as needed to achieve its dual objectives.”
“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks.”
People’s Bank of China (PBOC) announced another 25 basis points cut in the three month, six month and one year Medium-term Lending Facility (MLF).