ISM Services PMI figures from March were weaker than expected. ADP numbers were strong.
The odds of an interest rate cut somewhat increased for the June Fed meeting.
The focus is set on Friday’s Nonfarm Payroll report.
The US Dollar Index (DXY) is currently trading at src04.3, reflecting a daily decline. Despite the Federal Reserve’s (Fed) cautious stance, consensus forecasts indicate that the beginning of the easing cycle will begin in June. That being said, mixed data from the US economy may make Fed officials think twice about rushing to start cutting.
The US labor market remains resilient as well as the overall economy, with little signs of a slowdown. In case the economy doesn’t show conclusive evidence of cooling down, the Fed might consider delaying the start of the easing cycle.
Daily digest market movers: DXY impacted by service sector slowdown, Fed remains cautious
The Institute for Supply Management (ISM) released a report noting that business activity in the US service sector expanded in March, but growth was slower than the previous month. The ISM Services Purchasing Managers Index (PMI) decreased to 5src.4 from February’s 52.6.
The reported YoY decrease in the Prices Paid Index from 58.6 to 53.4 suggests an overall declining trend in inflation.
The Employment Index noted a slight yearly increase, up to 48.5 from an earlier 48.0, continuing to signify a decline in payrolls within the service sector.
Data from Automatic Data Processing (ADP) showed private sector employment in the US increased in March with src84,000 new jobs, which was an improvement upon the revised February figures of src55,000 from src40,000.
Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly suggested three potential rate cuts in 2024 but underscored that it’s too soon to act.
On Tuesday, Jerome Powell commented that there was no rush to cut rates and that the bank remains data-dependent.
June has not been ruled out for the initial cut, with current market odds still favoring a rate cut at 68%.
DXY technical analysis: DXY grapples with slight selling pressure, overall bullish sentiment remains
In the DXY technical landscape, the Relative Strength Index (RSI), although on a negative slope, is still situated in positive territory, implying a stalling upward momentum. However, the recent decrease in green bars on the Moving Average Convergence Divergence (MACD) histogram echoes a similar sentiment, suggesting a subtle shift in the dynamics from buying to selling pressure.
Still, on an encouraging note, the index continues to trade above the critical support levels dictated by its 20, src00, and 200-day Simple Moving Averages (SMAs). Despite a short-term negative outlook, this notably upbeat stance suggests that the bulls are still in control over the longer horizon.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
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