Increased risk appetite ruled the trading day after US unemployment data fell into two ends of the spectrum: surprisingly optimistic and deeply disappointing. Starting with the good news, non-farm payrolls (NFPs) fell by 216,000 in August, which was less than forecasts for a drop of 230,000 and the slowest pace of job losses in a year. At the same time, though, the unemployment rate jumped beyond forecasts to 9.7 percent - the highest since 1983 - from 9.4 percent. The hour after the release consisted of extremely choppy price action across the majors, but then the US dollar and Japanese yen went one direction as the DJIA and S&P 500 surged: down.
A breakdown of the overall NFP report shows divergence from leading indicators going in to the release, as the number of job losses in the manufacturing sector increased to 63,000 from 43,000 despite the rise in ISM manufacturing during the same period, which actually reflected an expansion in business activity for the first time in nineteen months. On the other hand, service-providing employment fell by 80,000 in August, compared to a decline of 154,000 in July and 251,000 in June. At the end of the day, the surge in the unemployment rate tells us that the US economy is still struggling to gain traction, despite proclamations that the recession has ended, and as long as jobless claims are rising, there will be little impetus for consumption - which makes up more than 70 percent of GDP - to improve.
With US markets closed on Monday for the Labor Day holiday, volumes should remain fairly thin until the start of European trading on Tuesday. At that point, potential for breakouts from the summer trading ranges will rise substantially. That said, Friday’s price action showed that risk trends are still driving moves for the low-yielding US dollar and Japanese yen, and this is likely to remain the case throughout next week as the US economic calendar will be fairly light.