Stocks climb after sizzling US jobs report

US labor market sizzles

The American economy continues to hum along, with the labor market still firing on all cylinders. Nonfarm payrolls rose by 303k in March, handily surpassing forecasts. What is most impressive is that the unemployment rate fell even as labor force participation rose, which suggests the new wave of workers entering the labor market were easily absorbed.  

It increasingly seems that heightened immigration flows are the main driver behind the persistent gains in US employment growth, something that would also help explain why wage growth hasn’t fired up.

This is a dream scenario for the Fed. Increased labor supply diminishes the risk of a wage-fueled reignition in inflation, while the boost in demand could help shield economic growth. Hence, the best of all worlds for a central bank trying to vanquish inflation while avoiding a recession.

Investors scaled back their bets on the timing and depth of Fed rate cuts following the employment report, and currently view the prospect of a cut in June almost like a 50-50 coin toss.  

Dollar cannot shine as equities jump

In the markets, the dollar jumped in the aftermath of this data but erased those gains in the following hours to close the session almost unchanged. There was no news catalyst behind the sudden reversal in the dollar, which seems to have been driven by a shift in risk sentiment.  

Stock markets soared as traders concluded that a booming labor market could ultimately translate into stronger corporate earnings, even if interest rates remain higher for a little longer. This optimism dampened the rally in the US dollar, as its safe haven qualities came back to bite. 

With equity markets trading near record highs and valuations being stretched in an environment where bond yields are rising, the stakes are extremely high going into the earnings season that kicks off this week. If earnings don’t live up to expectations, the stunning market rally could suffer a setback as rising yields begin to compress valuations.  

Oil retreats, but gold keeps flyingIn energy markets, oil prices opened the week with losses, pressured by signs that Middle East tensions are finally easing. Ceasefire talks are ongoing and the Israeli foreign minister expressed cautious optimism today, saying these negotiations are the closest the two sides have come to a deal in several months.  

But the calmer atmosphere was not enough to dent the rally in gold prices, which reached a new record high on Monday. Central bank purchases and Asian retail demand seem to be the driving forces behind the non-stop rally in gold, as the precious metal has defied the negative pressure exerted by rising bond yields and de-escalating geopolitical tensions.  

Looking ahead, it’s going to be a huge week for global markets, with a crucial US inflation report on Wednesday and three central bank meetings that could fuel volatility in most assets. Most important among those will be the European Central Bank decision on Thursday, where the central bank will most likely open the door for a summer rate cut.