Stocks soar and USD slumps as bad NFP raises Fed rate cut hopes

Summary:

• Big NFP miss (+75K vs +177k exp) raises hopes for Fed cut

• Buck slides lower; EURUSD up to 2 ½ month high

• US stocks up 5% from weekly lows

• FTSE posts 5th up day in a row

• Weaker European and Asian data point to slowdown

US stocks remain remarkably resilient in the face of negative news, with the market seemingly shrugging off a big miss in the April jobs report to remain close to their highest levels of the week. The non-farm employment change came in at 75k vs a median estimate of 184k and it seems like Wednesday’s ADP data which fell to its lowest level in 9 years was an early warning sign. As we pointed out in the market alert, in the 5 occurrences since 2010 that the ADP has come in below 90k the average NFP following was 72k and today’s print was very much in keeping with previous occurrences.

Moreover, wage growth eased a bit and we got a substantial downward revision to the previous two months in case of NFP. The jobless rate remained unchanged at 3.6%, as expected. Overall, the report seems to be in line with the latest rather weakish prints from the US and adds to investors’ expectations regarding upcoming monetary policy easing there.

It’s shaping up to be a nice week for stock market bulls with the S&P500 now up by almost 5% from Monday low around 2728. While a cooling of trade tensions on both the Mexico and Chinese front with the US has boosted sentiment, the markets seem to be mainly rallying on growing hopes for Fed rate cuts - and the bad NFP data has only served to heighten these calls. Whilst most data still points to a slowdown in the global economy and there has been no real tangible progress on the US-China trade front, the recent price action suggests that bulls have wrestled back control of the tap with a large bullish outside week forming for US stocks.  

The FTSE has ended the cash session in the green once more with the benchmark completing a clean sweep of daily gains this week as equities around the globe have bounced back from last month’s declines. After trading below the 7100 mark at the start of the week the UK stock index is now back above 7300 and is enjoying one of its best weeks of the year.  

Mario Draghi said during his post-meeting conference that the broad European economy is doing quite well and the question is for how long this could be the case given the weakness in the manufacturing sector. Well, so far this weakness persists: German industrial output and trade figures for April were way below the consensus. What is more, another drop in exports could be a sign that global demand remains soft. The data from Asia this week was second tier so there are no big changes. Among the PMIs for May there were actually some positive surprises (India for instance) but overall trend remains unfavorable as highlighted by weak manufacturing PMI in South Korea and a slide in the Chinese PMI for services sector.