US equities rally even as bond yields and the dollar surge
Nonfarm payroll employment surged by 303,000 in March, the most since May 2023, led by healthcare, government, leisure, and construction, the Labor Department’s Bureau of Labor Statistics reported on Friday. Meanwhile, the unemployment rate dipped from 3.9% in February to 3.8% last month, while wages rose moderately month-on-month and were unchanged over the year. The March jobs report showed that US companies hired a significantly bigger workforce than the 150,000-250,000 expected by Wall Street economists, even as February’s payroll figures were lowered from 275,000 to 270,000.
The solid jobs report also signaled that the US economy is on a strong footing, raising concerns about inflation rebounding, which will potentially delay the Federal Reserve from cutting rates anytime soon.
SOURCE: BUREAU OF LABOR STATISTICS WEBSITE
Chris Larkin from Morgan Stanley believes that the payroll report might not have shut the door on a June rate cut yet. But, if this week’s CPI and PPI reports come in hotter than expected, it could dent market confidence about the Fed’s commitment to lower interest rates sometime in the third quarter.
His view was echoed by Fed officials who spoke about the economy and interest rates on Friday. At an event at Duke University, Dallas Fed President Lorrie Logan said she’s uncertain if inflation will trend lower this year and thinks it is too soon to be talking about interest rate cuts. On the other hand, Federal Reserve Governor Michelle Bowman thinks there are several potential upside risks to inflation and believes interest rates might have to go higher to control it.
Meanwhile, the solid payroll data and a drop in the unemployment rate have driven Fed Funds Futures traders to lower their forecast of a June rate cut. According to the CME FedWatch Tool, about 51% of traders expect the US central bank to lower rates in June, and although they are still at a majority, that number is down from more than 55% a week back.
SOURCE: CMEGROUP WEBSITE
Key highlights of the nonfarm payroll and employment report
The nonfarm payroll employment report comprises stats from two monthly surveys- the household survey, which measures labor force status, such as unemployment, and the establishment survey, which gauges nonfarm employment, hours, and earnings by industry.
According to the household survey data, the unemployment rate has been in the 3.7%-3.9% range since August 2023, and the latest report put the number of unemployed people at 6.4 million, little changed from the previous month. The number of people without jobs for 27 weeks or more stood at 1.2 million, accounting for 19.5% of the total unemployed personnel. Meanwhile, those employed part-time for economic reasons were at 4.3 million, and those not in the labor force and searching for a job were at 5.4 million. Lastly, the labor force participation rate was at 62.7%, while the employment-population ratio was at 60.3%, little changed in March.
The establishment survey data showed nonfarm payroll employment in March was above the 12-month average of 231,000, with job gains primarily in health care, government, and construction, while they were little changed or unchanged in the other major sectors. On the earnings front, the average hourly earnings of all employees on private nonfarm payrolls rose by 12 cents, or 0.3% month-on-month and 4.1% over the past 12 months.
SOURCE: BUREAU OF LABOR STATISTICS WEBSITE
Market reaction to the nonfarm payroll and unemployment rate news
The US equity markets closed higher on Friday as the hotter-than-expected labor market report reinforced projections of a healthy US economy. The S&P 500 finished 1.1% higher, while the Dow Jones Industrial Average and the Nasdaq 100 registered gains of 0.8% and 1.28%, respectively. Gains were seen across the board, but investors remained cautious about the impact of the strong jobs report on consumer inflation and the Fed’s interest rate path going forward.
Tech stocks were the biggest gainers, with Amazon, Nvidia, and AMD leading the way, while Tesla fell more than 3% after the EV maker shelved plans to launch a widely anticipated low-cost car.
In the fixed-income markets, Treasury yields rose after the solid jobs report raised expectations that the robust US economic activity will drive the Federal Reserve to maintain interest rates at multi-decade highs in the near term. The yield on the rate-sensitive 2-year Note rose 10.3 basis points, while the yields on the 10-year Note and the 30-year bond climbed 9.1 bases and 8 points, respectively.
In the currency markets, the US dollar index rebounded from a three-day losing streak to close at 104.28 on Friday, up 0.08% for the session. While the strong March jobs report and the recent statements from Federal Reserve officials bolstered expectations that the US central bank will not lower interest rates in a hurry, the escalating geopolitical tension in the Middle East also supported the world’s reserve currency.
Technical View
Spot USD/JPY
The US dollar JPY pair closed near 34-year highs of ¥151.60 on Friday, up 0.18% for the session. The pair has been oscillating in a narrow 100 pips band between ¥151.00 and ¥152.00 over the past couple of weeks as traders look for direction amid a host of macroeconomic and geopolitical events, with the latter holding much more sway in the near term. Markets remain on the edge with geopolitical tensions in the Middle East mounting after Israel bombed the Iranian embassy in Syria last week, and the latter vowing revenge. While markets remain unsure when and how the Iranians will retaliate, it will likely determine if the USD/JPY heads toward ¥156.00 or slides to ¥149.00.
Trading strategy
Go long on spot USD/JPY at ¥151.00 with a stop and reverse at ¥150.60 for a profit target of ¥151.90. If the stops are triggered, hold on to the short positions with a stop at ¥151.30 and exit at ¥149.50.
On the other hand, if the yen extends losses from Friday’s close, short the pair at ¥152.00 with a stop and reverse at ¥152.40 for a target of ¥151.00. If the stops are taken out, hold on to the long trades, with a stop at ¥151.70, and exit as the pair approaches ¥156.00. Ensure to trail profits on the SAR trades.
Spot USD/JPY- Daily chart
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Arista Networks Inc (ANET)
Shares of the cloud networking firm jumped 3.06% to $297.60 on the NYSE on Friday, steering the near-term support level pretty well, despite heavy volatility over the past week. The stock is approaching a key breakout level at $302, a close above which prices could surge to new all-time highs of $314, with the medium-term target at $330-$340. On the downside, the immediate support is at $290, a close below which prices could slide anywhere between $254-$280.
Trading Strategy:
Go long on the stock at $280,00, with a stop and reverse at $275 for a profit target of $292-$300. However, if the stops are triggered, hold on to your short trades, with a stop at $283, and exit as ANET approaches $255. Long positions can also be initiated if ANET closes above $303, with a stop loss at $297 for a profit target of $314.
Arista Networks- Daily chart
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