The focus for the market early Friday was on the labor market, with the monthly release of official government employment figures.
By Peter Martin
Friday, May 2, 2014
The numbers surpassed expectations by some margin, with the change in non-farm payrolls for April weighing in at an impressive 288,000, compared to the consensus forecast from a survey conducted by Reuters of just 210,000, with a combined upward revision of 36,000 to the preceding two months. This was alongside a sharp drop in the unemployment rate, which fell from 6.7% to 6.3% and now stands at its lowest level in more than five years.
With many Fed officials warning of slack in the labor market, the question regarding this ostensible improvement in the unemployment rate is whether the fall was driven more by job creation or by a drop in the number of people looking for work. The answer, unfortunately, is that it looks more like the former than the latter, with the labor force plummeting by 806,000 in April and taking the labor-force participation rate down from 63.2% to 62.8%. We also need to take into account whether the data is being skewed by the improving weather after the unusually harsh winter. On Wednesday this week, the Fed re-iterated its stance that interest rates will be kept close to zero for a ‘considerable time’, but the market is now attempting to weigh up how the strength of today’s report affects the timeline for when the central bank will eventually decide to start tightening. The immediate reaction to the report was dollar-positive, with USD/JPY pushing up as high as 103.02, the highest it’s been in more than three weeks, while EUR/USD retreated to 1.3812. By late morning in New York both currency pairs had swung back to where they had been before the release of the report though, as geo-political risks began to play on the mind of market participants heading into the weekend.
Ukraine is very much a top of the headlines as we draw to the end of the week, with the government there launching an offensive against pro-Russia gunmen that have taken control of Sloviansk, a city in the east of the country. Two Ukrainian army helicopters have been shot down in the fracas and the UN security council is now set to meet to discuss the situation. The forex market has shown little reaction to events in Ukraine during the normal trading week, but caution can be more prevalent approaching the close on Friday, with the financial markets of course being shut at the weekend. This aids safe-haven currencies such as the yen, and by early afternoon In New York, USD/JPY was flat on the day.
The pound has had a good week against the dollar on the back of a string of strong economic reports, but that pattern was reversed on Friday, with the pound weakening after a purchasing managers’ index signalled a slowing in the pace of growth in the UK construction industry. The UK Construction PMI slipped to 60.8 in April from March’s booming rate of 62.5. This result was below forecasts and takes the index down to its lowest level in half a year, but remains deep into expansionary territory (with 50 delineating the divide between contraction and growth). Despite the slowing pace seen in this month’s report, growth is still strong enough for the outlook to remain positive for the UK economy, making things interesting with the Bank of England set to announce its next interest rate decision on May 8. By early afternoon in New York, GBP/USD was down 0.13% at 1.6871, on course at that level for a weekly gain.
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