Following strong U.S. job data, stocks and currencies recovered after a brief dip.
Emerging market currencies and stocks pared some of their gains on Friday after a much stronger-than-expected increase in US payrolls bolstered the case for another major interest rate hike by the Federal Reserve, but they quickly returned to pre-data levels.
The Fed’s action was expected. According to CME Group’s Fedwatch tool, traders’ bets on a 75 basis point increase increased to 97.7 % from 91.5 % before the data was released. According to data, nonfarm payrolls in the United States increased by 372,000 jobs last month, compared to an estimated increase of 268,000 jobs.
MSCI’s index of emerging market currencies index edged up 0.1% after dipping briefly into the red following the data, while its shares counterpart was last up 0.5%.
“It would take a terrible report for the market to re-price its Fed rate hike expectations,” said Fiona Cincotta, senior financial markets analyst, at City Index.
“Heading into the report, there is no doubt that the Fed and the market are more focused on inflation than the jobs data,” she said, referring to June consumer price numbers due next week.
But as Wall Street tripped after the data, Latam bourses followed suit, with Mexico’s IPC index sliding 0.8% to lead losses in the region.
In currencies, recovering oil prices lifted crude exporter Colombia’s peso from fresh record lows of 4,419.50 it hit early in the session. The currency was still in record low territory thanks to volatility in oil prices and, more locally, from elections last month that saw Colombia elect its first-ever leftist President.
Brazil’s real extended gains to a second day after hitting five-month lows earlier in the week, while Mexico’s peso rose 0.5%, moving firmly away from its lowest since mid-March.
Data on Friday showed Brazil’s consumer prices rose 0.67% in June, slightly below market forecasts as the country undergoes an aggressive monetary tightening cycle.
Peru’s sol rose 0.5% after the country’s central bank hiked its benchmark interest rate by 50 basis points to 6.0% – a 13-year high – late on Thursday as it struggles to tamp down stubbornly high inflation.
The currency, however, was still hovering near its lowest in nearly six months as strikes at its copper mines have hampered output at the world’s second biggest producer of the red metal.
Elsewhere, the Polish zloty recovered after a smaller-than-expected hike had dented the currency on Thursday. Central bank governor Adam Glapinski on Friday said a technical recession in Poland is possible next year.
After the initial job shock, the Nasdaq, SP 500, and Dow Jones all recover their losses.
Stocks cut early losses Friday as investors continued to digest a strong jump in payrolls.
The major averages fell early amid fears that the labor market’s resilience would bolster the Fed’s hawkish stance. However, traders may now conclude that little has changed in terms of the July FOMC meeting, with a 75 basis point hike nearly fully priced in.
According to Goldman economist Jan Hatzius, the report “indicates an overheated labor market that is only now beginning to cool.” “We continue to expect a 75 basis point increase in the fed funds rate at the July meeting, followed by +50 basis points in September and +25 basis points in November and December.”
Rates are still higher. The 10-year yield is up 7 basis points to 3.07%. The 2-year is up 6 basis points to 3.10%.
According to the BLS, the US economy added 372K jobs last month, exceeding the 270K expected by analysts. The unemployment rate in the United States remained unchanged at 3.6 percent, matching analyst expectations. The average hourly wage increased by 0.3 % , as expected.
“Payroll growth has softened considerably since last summer, but the recent numbers usually would be consistent with a raging economic boom,” Pantheon Macro’s Ian Shepherdson said. “The story today is much more about post-Covid catch-up hiring, but jobs create incomes no matter why they are being created, and solid job and income growth makes a recession very unlikely.”
“GDP almost certainly fell in Q2, for the second straight quarter, but job growth averaging 457K per month across the first half, with 375K in Q2. The NBER won’t call a first-half recession.”