US labour market: Raises concerns about state of the
economy: The USD came under sharp selling pressure after the payrolls data
for May came in much lower than expectations that forced investors to reduce
the odds of a rate hike over the June-July period.
Non-farm
payrolls increased by only 38000 in May after an increase of 123000 in April and
reading 150000 plus over the last year. We had anticipated a weaker reading given
that the Verizon workers strike. However, even after accounting for those
workers (35000) who went on strike, the actual reading was much below
expectations.
The
weakness in the payroll reading was fairly widespread with manufacturing sector
losing 10000 jobs, the construction sector losing 15000 jobs and temporary workers
falling by 21000.
The
only bit of good news was that the unemployment rate fell from 5% to 4.7% in
May but that was primarily reflecting a substantial reduction in the participation
rate. The participation rate has fallen to a five month low of 62.6%.
Despite the improvement in the unemployment rate, wages continued to
remain fairly subdued with the average hourly earnings increasing by only 0.2%
on a sequential basis in May compared to 0.4% increase in the previous month.
The muted pace of sequential increased kept the annual rate unchanged at
2.5%.
How to interpret the labour
market report? We view the recent release as an aberration given that other
labour market indicators such as—initial jobless claims and the JOLTs survey
are still consistent with an improving labour market. Hence, we expect payrolls
to increase around 150K mark in June. However, the weaker reading most
certainly considerably reduces the odds of a rate hike by the Fed over
June-July. Fed officials will likely need to give themselves sometime to
re-asses the strength of the US recovery before taking any action.
US ISM non-manufacturing index slips: Like the payrolls print, the
ISM non-manufacturing index fell from 55.7 in April to 52.9 in May. With the
reading remaining above 50 (break-even level), it does suggest that the
services sector is expanding but it is doing so at a more moderate pace. There
were small declines witnessed in most of sub-indexes: including the new orders
component and business activity index.
However, it was the employment component
that slipped into contraction territory of 49.7 from 53.0 that was the primary
reason for the downside disappointment.
Euro-zone: Consumer spending is slowing: While the focus was on the
US payrolls data, the Euro-zone retail sales release went relatively unnoticed.
It remained stagnant on a sequential basis in April suggesting that the strong
momentum of growth witnessed over 1Q is unlikely to sustain as the windfall
from falling global commodity prices gradually fades away. There was a very
marginal upward revision made to the Euro-zone flash PMI surveys for May.
However, it remains below the average levels witnessed over 2015-1Q2016. The
bottom-line is that we see Euro-zone growth remaining flat that is likely to
restrict the uptrend in the EUR.
The upshot
After the sharp rebound
witnessed over April-May, the USD could remain under pressure in the near-term.
However, we would use weakness in the USD as renewed buying opportunities.
We maintain our call that private consumption is likely to remain the main
pivot of growth in the US economy that is likely to ensure that growth is
likely to grow above its trend level.
This is visible in the retail sales and
consumer confidence readings over the last two months. Besides, growth in the
non-US world is likely to remain below potential level that will ensure that
the demand for US assets remains intact.
Hence, we see the USD rebounding
across the board with gains concentrated against the EM currency pack. In this
regard, the downtrend in the USD/INR pair should be viewed as a renewed buying
opportunity with a target of 68.50-69.00 by end-2016.
More will update soon!!
