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Forex

US payrolls rise more than expected in May

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U.S. employment increased more than expected in May, but a moderation in wages could allow the Federal Reserve to skip an interest rate hike this month for the first time since embarking on its aggressive policy tightening campaign more than a year ago.

Nonfarm payrolls increased by 339,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Data for April was revised up to show payrolls rising by 294,000 jobs instead of 253,000 as previously reported.

MARKET REACTION:

  • STOCKS: S&P e-mini futures extended a gain and were last up 0.5%
  • BONDS: The yield on 10-year Treasury note rose and was last up 4.3 basis points from the close at 3.651%; The two-year U.S. Treasury yield was up 10.2 basis points from Thursday at 4.443%.
  • FOREX: The dollar index edged up after the data.

COMMENTS

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH

“While it appears to be a hot number on the actual number of people employed, the wage rate is not increasing as fast.””This is very interesting as this shows that people are returning to the workforce.””The interesting thing is yesterday’s continuing claims remain low although the number of newly unemployed continues to be consistent, so that means people are getting jobs and it looks like wage pressures are coming down because we have more people entering the workplace.””That is a softening effect and is this the mythical soft landing? Looks like that.”

“This low wage inflation number is very good news for those of us who believe the Fed should pause.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK 

“Hourly wages is the key and they came in just in line with what was expected. The report, on the surface, looks strong but the fact that hourly wages are not rising moderately is a good sign. It shows that wages are not exploding and they’re beginning to moderate, even though they’re consistent from one month to another, which should be positive for markets.”

“In terms of the Fed, it doesn’t change the prospects of the Fed skipping in June, which means they will skip and leave the door open for a rate hike at the next meeting if inflation doesn’t remain elevated.”

ART HOGAN, CHIEF MARKET STRATEGIST, B RILEY WEALTH, NEW YORK

“The average hourly earnings, which is probably the more important piece of information which was estimated to be at 4.4%, came in at 4.3%. The Fed pays more attention to that particular line in the report then they do to the headline number.”

“The unemployment rate surprisingly moved from 3.4% to 3.7%. It is still an extremely low unemployment rate but (is the) first significant bump up and that’s something that we’ve been waiting for.”

“This is a reflection of a labor market that while still robust, is softening gently, not rapidly. That’s exactly what the Fed would like to see. The Fed wants to tame inflation without crushing the jobs market, and this is another piece of evidence that they’re actually well along their way to getting that accomplished.”

“We’ve got one more piece of data that’s important as it pertains to inflation before the Fed meets. But the Fed has enough evidence in hand to take a pass at the next meeting and remain data dependent for the July meeting, and that’s exactly what they’re trying to message to us.”

OLIVER PURSCHE, SENIOR VICE PRESIDENT, WEALTHSPIRE ADVISORS, NEW YORK.

“It was certainly much stronger than expected. I still think the Fed pauses I June but reiterates that it’s just a pause.”

“We’ve seen some earnings warnings, there’s a big lag in monetary policy, and we saw the unemployment rate tick up to 3.7%. Makes you wonder, is there going to be a rise in the (labor market) participation rate. That’s going to force unemployment up. There’s still an argument for the Fed to raise rates. The inflation picture is much stronger than they want it to be.”

“Right now, if you’re a Fed governor you’re very happy with this report. It continues to demonstrate the economy is resilient. Were not anywhere near a recession right now, and for the FOMC, it means they have elbow room to do the things they want to do.”

“If anything, analysts and economists are overestimating the downside risk for a recession and overestimating how quickly liquidity can be drained from the system.»

Forex

Explainer-What would Japanese intervention to boost a weak yen look like?

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By Leika Kihara

TOKYO (Reuters) – Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen, as traders drive down the currency on expectations that any further interest rate hikes by the central bank will be slow in forthcoming.

The yen rallied after Tokyo issued on Wednesday its strongest warning to date on the chance of imminent intervention, coming off a 34-year low of 151.97 to the dollar hit earlier in the day.

Below are details on how yen-buying intervention works:

LAST CONFIRMED YEN-BUYING INTERVENTION?

Japan bought yen in September 2022, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.

WHY STEP IN?

Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.

But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.

WHAT HAPPENS FIRST?

When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, that is a sign intervention may be imminent.

Rate checking by the BOJ – when central bank officials call dealers and ask for buying or selling rates for the yen – is seen by traders as a possible precursor to intervention.

WHAT HAPPENED SO FAR?

Finance Minister Shunichi Suzuki told reporters on Wednesday that authorities could take “decisive steps” against yen weakness – language he hasn’t used since the 2022 intervention.

Hours later, Japanese authorities held an emergency meeting to discuss the weak yen. The meeting is usually held as a symbolic gesture to markets that authorities are concerned about rapid currency moves.

After the meeting, Japan’s top currency diplomat Masato Kanda said recent yen moves were too rapid and out of line with fundamentals, suggesting Tokyo saw enough reason to intervene to arrest further declines in the currency.

LINE IN THE SAND?

Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.

With the dollar having breached levels that triggered intervention in 2022, market players see a sharp move above 152 yen as the next threshold, then 155 yen.

WHAT’S THE TRIGGER?

The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened in 2022.

If the yen’s slide accelerates and draws the ire of media and public, the chance of intervention would rise again.

The decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.

HOW WOULD IT WORK?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.

To support the yen, however, the authorities must tap Japan’s foreign reserves for dollars to sell for yen.

In either case, the finance minister issues the order to intervene and the BOJ executes the order as the ministry’s agent.

CHALLENGES?

Yen-buying intervention is more difficult than yen-selling.

While Japan holds nearly $1.3 trillion in foreign reserves, these could be substantially eroded if Tokyo intervened heavily repeatedly, leaving authorities constrained over how long they can defend the yen.

Japanese authorities also consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.

© Reuters. A worker holds samples of new Japanese yen banknotes at a factory of the National Printing Bureau producing Bank of Japan notes at a media event about the new notes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/File Photo

Washington gave tacit approval when Japan intervened in 2022, reflecting recent close bilateral relations. There is uncertainty on whether the same will happen when Japan next considers intervention.

A looming U.S. presidential election may discourage Japanese authorities from stepping in, given the risk of drawing unwanted attention and criticism from Washington as market meddling.

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Japan repeats verbal warning to yen bears, BOJ keeps dovish tone

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By Leika Kihara and Kentaro Sugiyama

TOKYO (Reuters) -Japanese Prime Minister Fumio Kishida said on Thursday the government will not rule out any options in addressing excessive moves in the currency market, stressing Tokyo’s resolve to step into the market if it sees the yen’s fall as overdone.

“It’s important for currency rates to move stably reflecting economic fundamentals,” Kishida told a news conference, when asked about the yen’s recent slide to three-decade lows.

“We will monitor currency moves with a high sense of urgency, and respond appropriately without ruling out any options to deal with excessive currency moves,” he said.

His remarks echoed those by Japan’s top currency diplomat Masato Kanda on Wednesday, when the yen hit a 34-year low against the dollar on expectations the Bank of Japan will go slow in raising interest rates, thereby maintaining the huge gap between Japanese and U.S. rates.

On Wednesday the dollar briefly hit 151.975 yen, exceeding the 151.94 level at which Japanese authorities stepped in during October 2022 to buy the currency.

On Thursday it lost some ground to stand at 151.370 yen.

The yen’s sharp declines come despite the BOJ’s decision last week to end eight years of negative interest rates, as traders focused more on its dovish message suggesting that another rate hike will be some time off.

Upon ending negative rates, many BOJ policymakers saw the need to go slow in phasing out ultra-loose monetary policy, a summary of opinions at last week’s meeting showed on Thursday.

“With the yen weakening to a fresh 34-year low against the dollar, the Ministry of Finance signalled that an intervention in the foreign exchange markets is imminent,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“However, the yen will certainly not get much support from Japan’s monetary policymakers as inflation is more likely to undershoot than to overshoot the Bank of Japan’s forecasts.”

Data due out on Friday is likely to show annual core inflation in Japan’s capital, which is considered a leading indicator of nationwide trends, slowed to 2.4% in March after a 2.5% gain in February, according to a Reuters poll.

© Reuters. A worker holds a sample of a new Japanese yen banknote at a factory of the National Printing Bureau producing Bank of Japan notes at a media event about the new notes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/File Photo

Japanese policymakers have historically favoured a weak yen as it helps boost profits at the country’s big manufacturers.

But the yen’s sharp declines have recently added to headaches for Tokyo by inflating the cost of raw material imports, hurting consumption and retail profits.

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Dollar soars after hawkish Waller comments; sterling, euro weaken

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Investing.com – The U.S. dollar rose in European trade Thursday following hawkish comments from a Federal Reserve official, while weak economic data weighed on the euro and sterling.

At 05:30 ET (09:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 104.320, near the highest level since mid-February.

Dollar boosted by Waller’s comments

The greenback has been in demand after Fed Governor Christopher Waller said, in a speech at an Economic Club of New York gathering late Wednesday, that recent disappointing inflation data affirms the case for the U.S. central bank holding off on cutting its rates in the short-term.

“There is no rush to cut the policy rate” right now, Waller said, as recent data “tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%.”

“The speech will have been a disappointment to dollar bears who might have been hoping for some reassuring confidence on the disinflation process and some further discussion of the seasonal problems with the firm January inflation data,” analysts at ING, in a note.

There is more economic data to digest Thursday, including weekly , fourth-quarter data and .

The main focus, however, will be on Friday’s release of the Fed’s favorite inflation gauge, the , when the market is shut for Good Friday.

Sterling, euro slump

In Europe, fell 0.3% to 1.0789, near its lowest in five weeks, after data released earlier Thursday showed that unexpectedly fell 1.9% on the month in February, illustrating the difficulties Europe’s largest economy was suffering in the first quarter.

European Central Bank officials have become very dovish of late, with board member Piero Cipollone the latest to hint at interest rate cuts as soon as June.

“Wage growth appears on track to gradually moderate in the medium term towards levels that are consistent with our inflation target and productivity growth, in line with the projections,” Cipollone told an event in Brussels on Wednesday.

“As our confidence in the timely convergence of inflation to our target grows, it also strengthens the case for adjusting our policy rates,” Cipollone said.

fell 0.3% to 1.2603, after data confirmed that the U.K. economy went into a shallow recession last year.

The country’s shrank by 0.1% in the third quarter and by 0.3% in the fourth, unchanged from preliminary estimates, meaning two consecutive quarters of negative growth.

Britain’s economy has shown signs of starting 2024 on a stronger footing, with monthly GDP growth of 0.2% in January, but with inflation slowing the Bank of England is moving towards the point where it can start cutting rates. 

Yen on intervention watch

traded 0.1% higher at 151.41, after surging as high as 151.97 on Wednesday – its strongest level since mid-1990.

Japanese authorities held a meeting on Wednesday on the currency’s weakness and ramped up their verbal warnings, meaning that speculation is running rife that intervention is close.

Japan intervened in the currency market three times in 2022, selling the dollar to buy yen, first in September and again in October as the yen slid towards a 32-year low of 152 to the dollar.

rose 0.1% to 7.2295, with the pair remaining well above the 7.2 level even as the People’s Bank of China set a substantially stronger-than-expected midpoint to stem more losses in the yuan.

 

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