Market Optimism as Jobs Data Shows Signs of Slowdown

April’s Jobs Report

Friday’s U.S. jobs data brought optimism among Federal Reserve doves. The labor market in April showed signs of a slowdown, with the economy adding only 175,000 nonfarm jobs. Wage growth fell to below 4%, still double the Fed’s inflation target but on a downward trend. The unemployment rate rose to 3.9%, compared to the anticipated 3.8%.

Rate Cut Expectations

Although the Fed isn’t expected to immediately cut interest rates, the data increased the chances of a rate cut earlier than anticipated. The odds of a September rate cut have risen to over 67%, though this would be tricky for the Fed with the presidential election nearing. Politically, no one at the Fed wants to be accused of influencing the results.

Market Responses

The U.S. 2-year yield briefly dropped to 4.70% following the jobs data, and the U.S. Dollar Index dipped below the 50-day moving average. However, with inflation still unresolved, gains could be limited.

Currency Movements

The EUR/USD tested 1.08 resistance, near its 50- and 200-day moving averages and at the top of the year-to-date downtrending channel. Breaking this level may require a soft U.S. inflation report next week. Meanwhile, the USD/JPY briefly slipped below 152, before rebounding as speculation grows that the Bank of Japan intervened. This intervention may soften the yen bears, as they recognize 160 as the crucial threshold.

Pound and Euro

Cable is challenging the 200-day moving average, but the widening gap between the Fed and the Bank of England may limit the pound’s potential against the dollar. The BoE is expected to consider a rate cut due to sluggish inflation and a weak economy, potentially undoing recent gains in the pound. Recent CFTC data indicates speculative positions have turned negative for the pound, given expectations that the BoE will lean dovish.

Australian Dollar Outlook

Ahead of the Reserve Bank of Australia’s rate decision, the AUD/USD saw gains. The RBA is expected to hold rates steady at 4.35%, but an upward revision of the inflation forecast could deliver a hawkish message and strengthen the Aussie. If U.S. inflation data emboldens Fed hawks, it could put downward pressure on the AUD/USD.

Energy and Equities

In energy, U.S. crude hit $78 per barrel. Near-oversold conditions and dovish Fed expectations could help oil prices recover to $80 and above.

In equities, dovish Fed pricing and strong earnings from Apple and Amazon boosted the S&P 500, which closed with a 0.6% gain last week. The index ended right on its 50-day moving average. Of the Magnificent 7, Nvidia isn’t due to report until May 22, giving investors reassurance. According to FactSet, 77% of S&P 500 companies have delivered positive earnings surprises, with overall earnings growth at 5.0% compared to 3-4% expected by analysts.