Talking Points:
- The US payrolls for May showed the slowest job growth in nearly five years and the biggest miss since the Crisis
- A delay in a Fed rate hike - or even the fading of normalization altogether - is only the surface impact
- Other tenative 'hawkish' currencies are hurt, currency wars are further stoked and a tipping point for mon pol nears
Having trouble trading in the FX markets? This may be why.
A market intently focused on the probabilities of a near-term Fed rate hike wouldn't miss the implications of a large miss in NFPs on the US Dollar. Indeed, the Greenback's stumble after the report was dramatic, but the consequence of US monetary policy stretches much further than the US borders. And, what many market participants may not appreciate; a delayed rate hike may not provide the same quiet and additional time that it has in the past.
Though the underlying trend in US labor conditions is robust - something for which the Fed has made a point to reinforce at regular intervals - speculative views on monetary policy carry tremendous sway over when the policy group is going to be able to follow up on December's hike from near-zero. The market is certain that a June 15 hike is off the table. Beyond the Dollar's slide though, we have seen: a visible weakness in currencies that have attempted gains on the prospect of following in the Fed's wake; a sharp drop in USD/JPY which threatens to provoke Japanese intervention to escalate competitive monetary policy; and remarkably apathetic response from the S&P 500 as a benchmark for 'risk trends'.
Looking beyond the short-term spillover effects of the shifting views for Fed timing, we have far more systemic issues at hand. A tremble in the world's largest economy intensifies the focus on slowing global growth. It also puts the financial system in a position to definitively cast its doubt over the world's largest central banks' ability keep a steady helm should another storm arise. A market-wide admission of such could readily prove the turning point for a complacent and richly priced market. We discuss the global implications of the outlook for US monetary policy and the NFPs that changed it in this weekend video.
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