Surprisingly strong labour market in the USA (Afternoon analysis 5.06.2020)

As almost nobody expected, employment in the US rose by 2.5 million in May. Another sharp drop of 7.5 million was expected. The decline in unemployment was also surprising, and the market reacted with optimism. However, the zloty remains one of the weakest EM currencies.

Resistant labour market

The event of the day and at the same time, one of the most important events of this week was the report on the US labour market for May. It surprised positively on a scale that we have not seen for a long time, not only in one piece of the report but in practically all of them. The number of new payrolls in May rose unexpectedly by 2.5 million, while it was expected to fall again by 7.5 million (20.7 million a month earlier).

The unemployment rate was also a big surprise: it was expected to rise to 19%, and it turned out that it fell to 13.3% from 14.7% a month earlier. However, there are some problems with this metric, and even the Bureau of Labor Statistics (BLS), which prepared the report, admitted that if everyone was properly classified, unemployment would be higher. Even with this correction, there would also be a drop from April's 19.7% to 17.7% in May.

Other important metrics of the US labour market in May were also optimistic. Professional activity is still far from pre-pandemic levels, but it increased to 60.8%, although also here a decrease was expected in relation to April (by 0.1 percentage point, to 60.2%). Considering the GDP for the Q2, hours worked may be important, which increased to 34.7 hours per week. Overall, it may turn out that the data for the current quarter will not be as disastrous as expected.

Appetite increases…

The publication of the US labour market report caused a strong increase in the appetite for risk and weakened the so-called safe havens, such as precious ores, the yen or the Swiss franc. Although the euro is still further strengthened by the European Central Bank's decisions to increase the stimulus package, the EUR/CHF quotations this afternoon have even increased above 1.09, reaching the highest level since December 19th last year.

US Treasury bond yields also increased strongly. Yields on bonds maturing in 10 years have already increased to nearly 1.00% (0.92 in an hour from the start of trading on the New York Stock Exchange). This is the highest level since March 19th, which also supported the dollar. The current market optimism, however, continues to act as a force weakening the dollar. And as long as this sentiment remains so optimistic, it will be difficult to strengthen the US currency more significantly.

...but not for the zloty

Further improvement in sentiment in the broader market is supported by the zloty, which was the weakest of emerging country currencies (EM) in the morning trade. In the afternoon, the Polish currency was no longer ranked last, but still remained one of the weakest currencies in the group.

The strong growth of optimism supported EM currencies, while the zloty remained practically stable in the afternoon in relation to the euro (the EUR/PLN pair is approx. 4.43), and even lost against the dollar (the USD/PLN pair is approx. 3.92). A surprisingly positive report on the US labour market strengthened good sentiment in the market, protecting the zloty against more profound losses. The internal weakness of the zloty may become more apparent if sentiment in the broader market starts to deteriorate or even recover.