The beginning of a new month starts the usual cycle of economic data. Among these only the US employment report is significant. A weak report would not only rule out a June hike by the Fed, but would call a September move to question as well. A strong report could mark the return of the dollar bulls after taking a six-week spring vacation.
In addition to the US jobs report, two other events stand out. First is the UK election on May 7. The polls and personalities make it difficult to envision a majority government being formed. In fact fragmented voting means the results of the election may not be known for some time after the votes are counted.
Second, last week’s news that the eurozone had emerged from deflation helped trigger a sell-off in German bunds that seemed to have reverberations through the capital markets. The 22 bp increase in yields brought the 10-year German yield nearly back to levels seen on March 9 when the ECB began its sovereign bond purchases.
The dollar bull case rested on two legs, easy monetary policy abroad, and the normalization of monetary policy at home. The better eurozone economic performance in Q1 and the easing deflation fears, helped by the rise in oil prices, had softened perceptions of one of the legs. The disappointing US economic reports weakened the other leg.
There are two camps. The first says that the weakness in Q1 is the beginning of the end of the US expansion cycle and that the Federal Reserve will not find the opportunity it is looking for to hike rates this year. The second says that Q1 is a bit of a fluke. The economic performance in the first quarter is not representative of the state of the US economy, and that growth will rebound.
The April jobs report will be a key factor in determining the relative merits of each side. The report will set the tone for the data in the coming weeks. A strong report would strengthen the second camp of course. It is not just about the net new jobs created (non-farm payrolls), but the unemployment rate and average hourly earnings.
The Bloomberg consensus calls for a 225k increase in non-farm payrolls after a disappointing 126k increase in March. An increase of more than 260k, which is the six and 12-month average, would ease concerns. The consensus expects the unemployment rate to tick down to 5.4% from 5.5%. Average hourly earnings are expected to have risen by 0.2%, which would lift the year-over-year rate to 2.3%, the strongest since August 2013.
