VTI - 13th Straight Monthly Jobs Beat Dollar Holding Above Key Support Eyeing USDU

2023-05-05 10:34:52 ET

Summary

• The April payrolls report revealed a bigger-than-forecast 235,000 jobs gain.
• While economy-wide hiring is slowing, the labor market remains hot, as evidenced by a very low 3.4% unemployment rate.
• Re-accelerating wage growth pressure the Fed, but stocks held their premarket gains.
• I'm watching moves in the US Dollar Index - there's one key support level investors must monitor.

The April employment report revealed yet another better-than-expected headline payrolls climb. 253,000 jobs were created last month, better than the 185,000-consensus forecast.

Private payrolls were +230,000, 70,000 better than what was surveyed. The unemployment rate, meanwhile, dipped to tie a cycle low of 3.4% (3.39% unrounded), matching the lowest percentage since 1969.

Average hourly earnings were 0.5%, much hotter than the +0.3% consensus forecast, and the loftiest figure since March 2022. The year-on-year rise is +4.4%, 0.2% also stronger than expected.

The average hourly workweek held at 34.4 as the labor force participation rate was also unchanged at 62.6. The underemployment rate was 6.6%, a 0.1% downtick from March.

Importantly, prior month revisions were -149,000, however. Meanwhile, the household survey used to determine the unemployment rate featured a 139,000 April payrolls gain.

Interest rates initially rose, while equities largely held their gains in the moments after the report. Long-term bond yields are higher on the week as a bull steepener continues.

A Robust April Payrolls Report, Downward Revisions

Both The Establishment And Household Survey Show Stabilizing Job Gains

3.39% Unemployment Rate: At Cycle Lows

Education & Health Services Lead April Payroll Gains

The April NFP climb was the 13 th consecutive hotter-than-forecast headline number.

An Incredibly Resilient Employment Situation Ongoing

I was impressed that stock market futures managed to hold their premarket gains. That tells me that fears of inflation are abating while growth risks are front and center. With stabilizing job gains at healthy levels, it is evidence that there’s no imminent recession, as defined by the National Bureau of Economic Research ((NBER)).

Even with the hot jobs number, there is still just a remote chance of another rate hike, according to the CME FedWatch Tool. The market expects the policy rate to be two full percentage points lower than where it is today by July next year.

Muted Risks Of Another Fed Rate Hike

Dollar In Focus

With a slew of key economic indicators now in for April, I am watching what the greenback is doing. The dollar’s peak last September helped usher in a bullish equity backdrop. What’s more, foreign stocks have generally outperformed domestic markets since late Q3 last year.

I see key support near 100 on the US Dollar Index. Should that level break – perhaps due to weaker economic conditions – then more alpha could be found overseas. Let’s dive deeper into one fund you can trade to play changes in the buck.

A Dollar ETF Play: USDU

According to the issuer , the WisdomTree Bloomberg U.S. Dollar Bullish Fund ETF (USDU) seeks to provide total returns, before fees and expenses, that exceed the performance of the Bloomberg Dollar Total Return Index.

The ETF features an annual expense ratio of 0.50% and offers investors a broad, dynamic, and effective way of gaining exposure to the U.S. dollar against a basket of foreign currencies in an ETF structure, per WisdomTree. In the last year, USDU is up 2.2% versus a –1.4% decline in the US Dollar Index and a 1.9% climb in the Invesco Bullish US Dollar fund (UUP).

I see a technical downside to the dollar should it break down through 100. There’s longer-term support near $89, and another 10%-plus fall would have massive implications for the performance of various asset classes. With a now negatively sloped long-term 200-day moving average, the bears appear to be gaining traction.

US Dollar Index: Important Support in the 100-101 Zone

I assert that a more sizable domestic recession would be needed to take the dollar that low, all while global growth hangs in there. Chances are, gold and crypto would do well in that scenario, while dollar-denominated assets like oil may suffer near-term due to the demand drop.

Large monthly payroll falls later this year could be that catalyst. Overall, I am a hold on USDU for now. Being long it due to its recent alpha is fine, but should we break through 100 on the DXY, then USDU would be a short opportunity. And there are options available on the ETF, so purchasing puts is another possible play.

The Bottom Line

I am a hold on WisdomTree Bloomberg U.S. Dollar Bullish Fund ETF following the jobs report. Should the US Dollar Index break under 100, then a bearish stance is warranted based on the technical momentum. With a strong employment picture continuing, there is near-term fundamental support for the greenback. The next volatility catalyst comes next week with the April CPI report.

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