As expected, ADP's publication of strong values of new employment for May revived the activity of investors in the financial markets, which led to a strengthening of the US dollar and a weakening of stock indexes in Europe and the United States.
According to the data provided by ADP, the number of new jobs sharply increased to 978,000 last month against the April figures, which were also lowered after the revision to 654,000 and the forecast of 650,000. In addition, last week's number of initial applications for benefits unemployment rates were below expectations, falling to 385,000 from 405,000 a week earlier and the forecast of 309,000.
So why did the stock markets, primarily in the US, and then in Europe, react negatively to this generally positive news? In fact, good news from the labor market points to the prospect of a more active recovery of the US economy, which means that investors still have some time range for buying shares of companies amid positive dynamics of economic growth. However, we are seeing a negative reaction instead.
Two reasons can be considered. On the one hand, positive news led to the traditional local growth in demand for the US dollar, which resulted in a weakening of interest in company shares before the publication of official data on employment from the US Department of Labor today. It is possible that some of the market participants do not want to take risks and stay in stocks awaiting this publication, fearing that the value of the number of new jobs may not be so happy. On the other hand, it is likely that a significant part of investors are afraid that stronger data will lead to the prospects of a sharp overheating of the US economy, which will force the Fed to think about changing the course of monetary policy.
Despite the probability of continued limited growth in the dollar rate in view of possibly stronger employment values, we do not expect a drop in investor interest in buying stocks. The dynamics of the price movement in the crude oil market indicate that investors expect a recovery in demand for raw materials in the process of growth of the US economy. In this case, we expect a decline in the US dollar after a local recovery and a return of interest from market participants to buy shares.
The only negative factor for improving market sentiment is a noticeably lower increase in the number of new jobs. We expect that the release of US employment data today may lead to increased volatility in the markets, so we should be very vigilant.
Forecast of the day:
The EUR/USD pair left the range of 1.2160-1.2260. If the employment data show an increase in the number of new jobs above expectations, this will lead to a continuation of the pair's local decline to the level of 1.2050.
The GBP/USD pair also left the range of 1.4100-1.4235. We believe that it can continue a limited decline amid the positive US news and then decline to the level of 1.4000.