U.S. April employment data disappoints amidst concern for inflation

Economic outlook

The Bureau of Labor Statistics released nonfarm payroll numbers Friday morning, which showed the U.S. gaining only 266,000 jobs, despite economist expectations of a 1,000K gain. Unemployment, which had been expected to fall slightly to 5.8%, actually rose to 6.1% in April. Rates unsurprisingly reacted negatively to the news, continuing their fall that began on Monday.

Treasury yields fell to start the week after disappointing manufacturing data. The ISM Manufacturing Index for April was released and showed a number of 60.7, which came in well short of the consensus 65.0. Rates recovered slightly on Tuesday after a strong statement from Treasury Secretary Janet Yellen. Yellen stated “that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” causing an immediate rebound in yields. Yellen attempted to soften her comments later in the day saying “It’s not something I’m predicting or recommending” and assuring that she respects the independence of the Federal Reserve.

Despite poor jobs data and concern for inflation, the S&P rose to a record high on Friday, as investors shrugged off the weak employment data. Investors appear to be betting that the disappointing jobs number will keep the Federal Reserve’s current policy of low rates and bond-buying in place.

Commodities

Commodity prices continue to surge amidst increasing demand. Oil prices hovered above $65 per barrel, with U.S. inventories dropping by nearly 8M barrels, the largest decline since mid-January. Lumber and copper reached all-time highs this week amidst low inventories struggling to keep up with demand. Futures prices on lumber surged by more than 500% since early April 2020. New single-family homes now cost nearly $36K more on average. Meanwhile, analysts have predicted that copper could surge as high as $13K per metric ton in the coming years after crossing $10k for the first time in a decade. While commodities have historically shown materially higher volatility than currencies or rates, the combination of volatility and price momentum has triggered many companies to evaluate financial hedging alternatives in addition to physical measures in place. For companies with existing hedging programs, many are evaluating which product choices are advantageous in the current market environment.

(Related insight: Read, "Using commodity collars to manage market volatility")

Foreign Exchange

The U.S. Dollar fell on Friday morning after the release of the disappointing employment numbers. This continued the trend of U.S. dollar weakening that we have seen over the last month. The Canadian dollar reached a three-year high in relation to USD on Thursday. Given CAD’s strong correlation to the price of oil, along with the price of oil remaining high, the market appears to expect CAD to continue to strengthen. This echoes the general trend of USD weakening across major currencies as investors flow into foreign currencies amidst expectations of continued economic expansion.

(Related insight: Read "Performing a holistic review of your operational hedging program")

Looking ahead

The market will be keeping an eye on the CPI numbers, scheduled to be released on Tuesday, as well as PPI and Weekly Jobless Claims, both scheduled for Thursday. The current expected CORE year-over-year level is 2.3%.