US: Dovish Fed rhetoric dampens impact of payrolls report - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on the defensive in the Asian trading session still undermined by the dovish shift in market expectations for Fed policy.

Key Quotes

“The market remains unconvinced that the Fed will raise rates again this year. The release on Friday of the stronger than expected non-farm payrolls report for March has failed to prompt a reassessment of the market’s current dovish outlook for Fed policy. The limited market reaction to the non-farm payrolls clearly highlights the perception that recent more dovish Fed rhetoric has raised the bar for further rate hikes.

It will likely take a more sustained run of stronger US economic data including further evidence of higher wage growth and inflation to create a more supportive trading environment for the US dollar still leaving it vulnerable in the near-term.

Nonetheless the Fed will have been encouraged by the non-farm payrolls report which revealed further evidence that the labour market continues to improve. Employment growth remains robust both in the establishment and household surveys averaging 209k jobs and 464k jobs gains/month respectively over the last three months.

The unemployment rate has remained more stable in recent months as well despite robust employment growth as it has been matched encouragingly by robust labour force growth. It has been the strongest period of labour force growth since the first half of 2000. Higher labour force growth if maintained provides both a more favourable signal for the outlook for economic growth and should help to dampen inflation as well.

The release of the stronger than expected ISM manufacturing survey provided another encouraging signal that slowdown in the manufacturing sector is now easing. The headline index has increased by 3.6 point over the last two months reaching its highest level since July of last year. The new orders index has rebounded even more sharply by 9.5 point since bottoming at the end of last year signalling that further improvement is likely in the coming months as well.

With the drag from the manufacturing sector beginning to ease, the market’s focus will shift to the release tomorrow of the latest ISM non-manufacturing survey to see if it provides a similar signal that economic growth is likely to pick back up in Q2 after what appears like two quarters of more subdued growth at the turn of the year.”