Today we take a dive into some of the economic news and using the skills we have learnt in the previous blogs, let us see if we can make heads or tails on what it means for you. We will combine skills from US non farm pay jobs and US dollar index blogs. As a reminder US non farm payroll data, is data that shows employment statistics growth or decline in the construction, goods, and manufacturing sectors. The US dollar index measures the strength of the dollar against, the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.
On May 7th 2021 the US announced the non-farm payroll data for the month of April and stated that the US economy had added 266,000 new jobs. They then revised the number for March down from 916,000 to 777,000. What was expected after the March numbers was that April numbers would be upwards of 1 million.
Remember, having previously said that the US is a consumption driven economy. Consumption is a function of disposable income, with the primary source of income being employment. Therefore, with only 266,000 jobs added, it should translate to a dampening of demand in the US economy and therefore a slowing down of the same.
In the US non farm payroll blog, we mentioned that if the non-farm payroll continued to increase at a upwards of 700,000 jobs per month we would see a strengthening of the dollar and an increased risk appetite. If you look at the period between February and March 2021 where the US added (before the revision) close to 1 million jobs, the US dollar index increased from 90.1 points to 93 points by end of March. This highlights the US dollar strengthening against the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.
At the same time Stock prices also gained. As jobs are created consumption increases, company profits increase and therefore stocks become more attractive. The S&P 500 which measures the general movement in stock prices in the US moved from 3,768 points in March to peak at 4,232 points. This confirms what we learnt in the two blogs on employment and exchange rate.
However as stated above, in the month of April, the US jobs number was below par and therefore the opposite happened to the US dollar and general risk appetite. The US dollar weakened and the general risk appetite reduced. From May 7th 2021, the day of the announcement, the US dollar index has dropped from 91.22 points to 90.12, as of May 11th 2021. US dollar index has dropped from a high of 93.06, at the beginning of April 202. This means that the US dollar weakened. The effects of a weakening Dollar can be found in the US dollar index blog. Risk appetite also reduced as the S&P 500 dropped from 4,232 to 4,150 points on the day of announcement. The sentiment is that the US economy might not be recovering as fast as we all thought.
What does all that mean to you,
- US stimulus spending is not about to end anytime soon. This translates to more cheap risk free money circulating, which might all end up in the stock market, meaning stock prices might continue to rise on the back of no fundamental increase of their own but on cheap money.
- Inflationary pressures will continue to rise as more money is poured into the economy but with no similar rise in supply.
- A slow US economic recovery means a drag on global demand for commodities and that means a gradual drop in their prices, reduced export earnings and currency volatility.
- Interest rates might be held steady at near zero levels. (To find out what this means look out for the next blog post)