Dollar Jumps on All Round Better than Expected NFP

Market overviews

Dollar surges in early US session after non-farm payroll report beat market expectation on all front. The job market grew 223k in May, above expectation of 190k. Unemployment rate dropped to 3.8%, beat expectation of 3.9%. That’s also the lowest level in 18 years. More importantly, wage growth was solid. Average hourly earnings rose 0.3% mom, beat expectation of 0.2% mom. Fed is widely expected to raise interest rate again on June 13 even though market pared back some bets. Today’s data will put Fed back on track for another hike in September.

While dollar is strong today, for now, it’s overwhelmed by Sterling which was lifted by better than expected PMI manufacturing earlier today. On the other hand, yen is trading as the weakest one as global stock markets shrugged off trade war threats. German-Italian yield spread also narrowed as Italy finally formed a government. Spain’s Prime Minister Mariano Rajoy was vote out of office today and Pedro Sánchez will take over. The change is also well received by the markets.

EU Juncker committed to work with new Italian government

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A European Commission spokesperson said that they have “full confidence in the capacity and willingness of the new government to engage constructively with its European partners and EU institutions to uphold Italy’s central role in the common European project.” Also, President Jean-Claude Juncker “is committed to work with the new Italian government to take on the many common challenges that Italy and Europe are facing, from trade to migration and many more.” Juncker will meet new Italian Prime Minister Giuseppe Conte next week  at a G7 meeting in Canada.

UK PMI manufacturing rose to 54.4, rebound far from convincing

UK PMI manufacturing rose to 54.4 in May, up from 53.9 and beat expectation of 53.5. Markit noted in the release that output growth ticks higher despite slower expansion of new work received. And, supply-chain constraints and cost pressures intensify. Rob Dobson, Director at IHS Markit, noted in the statement that “scratch beneath the surface and the rebound in the PMI from April’s 17-month low is far from convincing.” In particular, “manufacturers have yet to fully adjust their production to the weakening trend in new business growth”. Also “manufacturers will also likely be constrained if the resurgence in both cost inflation and supply-chain pressures becomes more firmly embedded.”

Eurozone PMI manufacturing finalized at 55.5, 15-month low

Eurozone PMI manufacturing was finalized at 55.5, unrevised from initial reading. The Netherlands, Germany and Austria remain strongest performing nations despite some deterioration. Netherlands PMI manufacturing, despite hitting an 8-month low, was at 60.3. Austria PMI manufacturing hit 14-month low at 57.3. Germany PMI manufacturing hit 15 month low at 56.9. Chris Williamson, Chief Business Economist at IHS Markit noted in the release that “some of the weakness may have been related to a higher than usual number of holidays during the month, but risks appear tilted towards growth remaining subdued or even cooling further in coming months.”

Also released in European session, German PMI manufacturing was revised up by 0.1 to 56.9. France PMI manufacturing was revised down by 0.7 to 54.4. Italy PMI manufacturing dropped to 52.7 in May, down from 53.5. Swiss PMI manufacturing dropped to 62.4 in May, down from 63.6.

China Caixin manufacturing PMI unchanged at 51.1, export situation still disappointing

China Caixin manufacturing PMI was unchanged at 51.1 in May, slight below expectation of 51.2, indicating modest expansion. Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group noted that “the index for new export orders picked up in May, but remained in contraction territory, reflecting that the export situation was still grim.” And, “overall, operating conditions across the manufacturing sector remained stable. The growth in the price of industrial products has gained momentum, however, the export situation was still disappointing.”

Also release in Asian session, Japan PMI manufacturing was finalized at 52.8, revised up from 52.5. Japan capital spending rose 3.4% in Q1. New Zealand terms of trade dropped -1.90% qoq in Q1. Australia PMI manufacturing dropped to 57.4 in May, down from 58.3.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 108.46; (P) 108.74; (R1) 109.09; More…

USD/JPY’s rebound from 108.10 extends higher and focus is now back to 109.82 resistance. Break there will indicate completion of the pull back from 113.39. And that will revive the bullish case that rise from 104.62 is still in progress. On the downside, though, break of 108.10 will extend the fall from 108.10 to 61.8% retracement of 104.62 to 111.39 at 107.20 instead.

In the bigger picture, USD/JPY remains bounded in medium term falling channel from 118.65 (2016 high). Current deeper than expected fall from 111.39 argues that fall from 118.65 is not finished. Break of 104.62 low would target 98.97 or even below. Though, break of 111.39 will revive the case that fall from 118.65 has completed and turn focus to 114.73 for confirmation.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
22:30 AUD AiG Performance of Manufacturing Index May 57.5 58.3
22:45 NZD Terms of Trade Index Q/Q Q1 -1.90% -2.00% 0.80% 1.50%
23:50 JPY Capital Spending Q1 3.40% 3.20% 4.30%
00:30 JPY PMI Manufacturing May F 52.8 52.5 52.5
01:45 CNY Caixin PMI Manufacturing May 51.1 51.2 51.1
07:30 CHF PMI Manufacturing May 62.4 62.5 63.6
07:45 EUR Italy Manufacturing PMI May 52.7 53 53.5
07:50 EUR France Manufacturing PMI May F 54.4 55.1 55.1
07:55 EUR Germany Manufacturing PMI May F 56.9 56.8 56.8
08:00 EUR Eurozone Manufacturing PMI May F 55.5 55.5 55.5
08:30 GBP PMI Manufacturing May 54.4 53.5 53.9
12:30 USD Change in Non-farm Payrolls May 223K 190K 164K 159K
12:30 USD Unemployment Rate May 3.80% 3.90% 3.90%
12:30 USD Average Hourly Earnings M/M May 0.30% 0.20% 0.10%
13:30 CAD Manufacturing PMI May 55.5
13:45 USD Manufacturing PMI May F 56.7 56.6
14:00 USD Construction Spending M/M Apr 0.80% -1.70%
14:00 USD ISM Manufacturing May 58.1 57.3
14:00 USD ISM Prices Paid May 77.9 79.3