The Economy Awakens as the U.S. Labor Market Rallies

05/12/2015 | David Joy

The U.S. labor market rebounded in April, adding 223,000 new non-farm jobs after a March slump that was even weaker than first reported. The unemployment rate fell to 5.4 percent, its lowest reading since May 2008, while average hourly earnings barely edged higher, leaving the year-over-year increase at just 2.2 percent.

Capital markets cheered the report, as it suggested the economy was awakening from the first quarter slowdown, yet without much discernable wage inflation, reducing the already low odds of a June rate hike by the Federal Reserve. Before the Fed's next meeting on June 16 and 17, it will have the benefit of just one more month of jobs and inflation data, unlikely to trigger a rate hike by themselves, regardless of their strength.

The S&P 500 added 1.3 percent on the day, propelling the index to a modest gain of 0.4 percent for the week, reversing the prior week's decline. The yield on the Treasury ten year note eased back to 2.15 percent from 2.18, but still rose from the prior week's close of 2.11 percent. The two-year note yield also fell on the jobs news, closing on Friday at 0.57 percent, down from 0.63 percent on Thursday and below the prior week's close of 0.60 percent. This week's economic calendar continues with insight into early second quarter activity, with retail sales and industrial production, as well as consumer sentiment.

Greece Continues Negotiations With Creditors

In the Eurozone, negotiations between Greece and its creditors continue to edge closer to a showdown. Reportedly, little progress toward a deal has been made, despite Monday's scheduled meeting of finance ministers and Greece's scheduled payment of 750 million euros due to the International Monetary Fund (IMF) on Tuesday.

A missed payment would not immediately constitute an event of default, but it would start the clock ticking. Popular support for the anti-austerity negotiating position of the governing Syriza party has fallen dramatically to a slim majority from above 80 percent following the January election.

However, that erosion has yet to lead to concessions at the bargaining table, as the game of brinksmanship plays out. Nevertheless, Greek stock and bond prices have retained most of the gains from their recent April 21 low, following the government's mandatory cash transfer from local authorities and an increase in emergency lending authority to the banking system from the European Central Bank (ECB).

The Decline of the Euro vs. the Dollar Reverses

Receding expectations of an imminent rate hike in the U.S. and evidence of firming economic activity in the Eurozone have led to a near-term reversal in the long decline of the euro versus the dollar. One year ago the exchange rate was 1.38. It bottomed on March 13 at 1.05, and had climbed to 1.13 by last Wednesday before slipping to 1.11 at week's end.

The jury is out on whether this reversal is simply temporary, due to resume when the Fed does raise rates, (possibly now in September), while the ECB simultaneously pursues its sizeable program of quantitative easing. Or, whether the reversal will be longer lived, should the Fed remain on hold for longer and should global growth continue to firm, both in the Eurozone and beyond.

If that scenario unfolds, then the crowded trades of being long the dollar, long U.S. stocks focused on domestic revenue generation, while underweight foreign revenue generators and commodities would be turned on their head. For this to happen there certainly would need to be more evidence of firming economic activity overseas and little or no immediate pressure on inflation domestically. And the Greek situation would need to be resolved and eliminated as a distraction. But, it is worth considering, especially with consensus leaning so heavily in the opposite direction.

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