US jobs not so bad falling yields dampen USD rally

There were three main elements of disappointment in today’s jobs report, which are sufficient in allying fears of a premature hike in interest rates by the Fed. Firstly, the weaker than expected jobs growth of 209k (vs expectations of 230k and previous reading of 298k). Secondly, the first increase in the US unemployment rate for five months to 6.2%. And thirdly, the soft average hourly earnings  of 2.0% (vs expectations of 2.2%).

Overall picture remains dominated by these positives:

-    Sixth consecutive month of +200k NFP: best showing since 1997
-    Employment participation rises to 62.9%: first rise in four months
-    Average hourly earnings y/y rise in five out of last seven months
-    Core PCE price index +1.5% y/y, on track for this year’s uptrend
-    Jul Manufacturing ISM hits 57.1: highest since April 2011, alongside all major components.

Yields-stocks divergence = “Bad news is good” is back

Equities return to the paradigm of “bad news is good” as the chart indicates below, with S&P 500 futures rallying immediately on the miss in NFP and rise in unemployment rate.

This is based on the interpretation that Fed doves, such as Yellen, will have more economic grounds to cling on in future pronouncements such as the upcoming Jackson Hole, when bond bears attempt to gain ground ahead of the October conclusion of the Fed taper.

Which currencies will USD struggle against?

Although EUR/USD rebounded to the 1.3430-40 level required to maintain support above the two-year trendline, the three-month downtrend remains intact, while capping any bounce nearing 1.3490s for an eventual return towards 1.3280-90.

AUD and GBP remain our preferred candidates for buying the dips against USD; while NZD, CHF join EUR in selling their intermittent rebounds.