Equity markets ended May quite clearly above the bar. The dollar was weak, primarily burdened by softer rhetoric from the Fed and also massive excess liquidity in the global financial sector.
Friday's US labour market data will be in the spotlight this week. Today, volatility will not be helped by the extended weekend on both sides of the Atlantic: Wall Street and the City of London are off.
The fate of the dollar depends on the labour market
For global markets, with a particular focus on a currency basket and emerging market assets, the most important issue is the future of Federal Reserve policy. It is crucial when it will start cutting the monetary help by reducing the pace of asset purchases from the current 120 billion USD per month. In 2013, this process (known as tapering) was a powerful blow to emerging markets and supported the dollar. However, the difference is that it was a shock and the result of an unfortunate communication from the Federal Reserve that caused panic in the markets, especially bonds. This time, the issue has been the central focus of market considerations for several months. The Fed has been very careful to prepare the ground for announcing a decision. Currently, there is a discussion on how to communicate that a real debate on this issue is underway. As a result, the impact of this factor, also in the context of the strong reshuffling in the debt markets in the first part of the year, may not be enough to permanently strengthen the dollar.
At the same time, at the moment, the Fed is mainly focused on the job market - its return to pre-pandemic levels will be a necessary condition for normalization. Employment change in April fell far short of forecasts (266 thousand new jobs instead of about one million), so the report for May is especially eagerly awaited. The weekly data on the number of new jobless claims continues to be the lowest since the pandemic outbreak, and a drop below 400 thousand this week is realistic. However, these figures do not show the whole picture because an increasingly important problem for many companies is finding workers. In other words, there is not a problem with the demand for labour but rather with the supply of labour. This is why Friday's report is so important. It is worth noting that after the recent data suggesting that the economy is not rushing any faster than the Fed anticipated in its March forecasts, the bar for expectations of dollar-supportive readings is set relatively low.