“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.
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.
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