NFP Blows Away Expectations

Daily Analysis - 11/07/2016

US Payroll Figures Fly Past the Highest Forecasts of Economists


After several disappointing unemployment readings in the prior months, the official BLS report for payrolls released on Friday showed the US economy created a stunning 287,000 jobs during the month of June.  Besides improving the outlook for the economy, it also gives the impression that the weakness reported in May was just temporary, paving the way for a resurgence in 2016 rate hike expectations.

US Labor Market Bounces

As evidenced by the June FOMC decision where policymakers opted to hold interest rates steady at 0.50%, employment plays a critical role in decisions related to monetary policy.  However, Friday’s reading of nonfarm payrolls gives credence to the idea that the Federal Reserve may be able to raise rates an additional 25 basis points before the end of the year following the stunning rebound in job creation.  The US economy managed to add 287,000 jobs during the month of June according to the Bureau of Labor Statistics, however, May was revised even lower, falling to only 11,000 new jobs from the 38,000 initially reported.  While widely anticipated, unemployment ticked modestly higher to 4.90% from 4.70% prior. The reaction in financial markets was significant, with key US equity indices surging to the upside and the S&P 500 touching a new intraday record at 2133.00


Chinese Inflation Slows Again

Amid the slowest growth in decades, Chinese inflation is once again becoming a concern for policymakers after the latest data showed downward prices pressure emerging once more for consumer prices while producer prices have remained firmly in deflation for 4-straight years now.  Data reported by the National Bureau of Statistics in China showed that headline annualized inflation fell to 1.90% during the month of June, down from the 2.00% announced a month earlier and falling to the lowest levels since January.  On a monthly basis, consumer price inflation has been in deflationary territory for 4 of the last 5 months, indicating that further policy easing may be on the way from the People’s Bank of China in the form of interest rate cuts or bank reserve ratio requirements being reduced.  The Chinese Yuan remains under pressure, with the offshore USDCNH pair trading near the highest levels since January.


All Eyes on European Banking

Following the stunning losses last week at the world’s oldest banking institution, Banca di Monte Paschi dei Siena, traders are shifting their focus, this time from the Brexit fallout to the ongoing nonperforming loan problems encircling the Italian banking sector.  There are fears that this may lead to a new round of contagion across Europe, with Deutsche Bank feared to be the next major risk to the financial system.  The German economy has certainly performed better than other Euro Area peers considering the Government managed to turn budget surplus in 2015 while unemployment, which currently stands at 4.20%, is less than half the comparable Euro Area measure of 10.10%.  However, should Deutsche Bank shares come under additional pressure, the current DAX 30 downward trend could accelerate, potentially forcing the ECB to act in order to boost the region’s financial sector.


Safety Bid Remains Intact

Although the latest US payrolls figures were greeted with a degree of optimism, the initial volatility that occurred in precious metals gave way to further upside in both gold and silver prices as markets digested the unemployment data.  Even considering the increased probability of US interest rates staying on hold for a prolonged period of time, the declining possibility of the Federal Reserve opting to cut interest rates would have normally fueled US dollar upside, hurting precious metals.  However, momentum higher in silver prices remained steadfast, with the precious metal climbing to the highest levels since July of 2014 before retreating modestly.  Spot silver reached as high as 21.135 per troy ounce before pulling back below $21.000 to $20.420 per ounce where it is currently trending.


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