Major Events of Last Week
The US Department of Labor issued its eagerly awaited report for June last Friday by disclosing a better-than-expected non-farm payroll figure of 195K, which easily surpassed analysts’ expectations of 160K. Further good news ensued when the numbers produced for this important economic parameter were revised higher for both May and April. Subsequently, the markets surged upwards exemplified by the Dow Jones Industrial Average charging higher by almost 150 points; the S&P 500 rising by nearly 17 points and the NASDAQ climbing by over 35 points.
The significance of this encouraging US employment data cannot be underestimated because the US Federal Reserve regards the state of the US labor market as possibly the most important factor when determining its future monetary easing policies. As such, many prominent economists are now advising that the promising non-farm payroll number should increase the possibilities that the Fed will start trimming back its influential asset purchasing program as soon as this coming September.
The improving state of the US labor market has also provided the Fed with the luxury of tapering back its current stimulus measures which is in stark contrast to intentions of other global central banks. For example, both the European Central Bank (ECB) and the Bank of England maintained their benchmark interest rates at historic lows last Thursday vowing that they will continue to support their current monetary easing policies for the foreseeable future.
Economists are now advising that this diversification between the Fed and its overseas counterparts is very favorable for the US economy. The impact of this development was immediately seen last Friday when the yields of the US 10-year bonds surged to their highest levels in over 2 years. The 5-year and 7-year yields also recorded values not witnessed since the middle of 2011.
The strong labor report also benefitted the US Dollar which surged against most of the other major currencies last Friday. For instance, the greenback registered a 6 week high against the Euro and a 5-week high against the Yen. The US Dollar always strengthens whenever news emerges indicating an earlier-than-expected slowdown in the Fed’s quantitative easing policies. This is because the threat of USD devaluation is significantly reduced. Gold took another hammering last Friday as it continued to lose its hedging appeal against inflation.
What to Expect This Week
The European Central Bank (ECB) made assertive comments last Thursday when it emphatically stated that its benchmark interest rate would remain at its current low level for some extended period of time. The ECB also advised that further cuts should not be ruled out. This new dovish tone caused investors to flee the euro epitomized by the EUR/USD crashing by over 150 pips towards the end of last week.
The Eurozone faces a relatively calm week ahead with just a few economic indicators scheduled to be published. The markets will be particularly interested in the releases of the German industrial production figure on Monday and the Eurozone industrial number this coming Friday. Weaker-than-expected results will exert even more pressure on the struggling Euro.
In fact, many currency analysts are predicting that the EUR/USD could soon record a new low for 2013 because of the present weak state of the single currency. You should also focus on both Portugal and Greece this week. For instance, will the latter receive its next tranche of bailout aid? Will the Portuguese government survive its current precarious position?
The USA is scheduled to post some important economic data over the coming days including the minutes from the latest meeting of the Federal Open Market Committee (FOMC) on Wednesday at 2.00pm EST. The weekly jobless claims number will then be issued on Thursday followed by Producer Prices on Friday. The largest market movers will almost certainly be the FOMC minutes and a press conference to be held by Ben Bernanke, the Fed Chairman, on Wednesday.
Investors will especially be interested to learn how Bernanke views the strong US labor report issued last Friday and whether the quality of this data will be sufficient to entice the Fed to instigate an early slowdown of its monetary easing programs. If any such indications are revealed then they could generate a sharp sell-out of equities. In contrast, the US Dollar will receive a significant boost that could help the USD/JPY test its 2013 yearly highs.