Stocks rally after US jobs data offer rate relief

The dollar plunged and equity markets soared yesterday as a batch of unexpectedly weak US economic data pointed to an early peak to the interest rate cycle.

The dollar plunged and equity markets soared yesterday as a batch of unexpectedly weak US economic data pointed to an early peak to the interest rate cycle.

A rise in unemployment and a sharp slowdown in new orders from manufacturers raised hopes that the US economy's red-hot growth may be slowing.

The unemployment rate suffered an unexpected rise in May as businesses shed 116,000 jobs in May while wages rose more slowly than forecast. The jobless rate rose to 4.1 per cent last month from April's 30-year low of 3.9 per cent. Economists had expected the rate to remain unchanged.

Meanwhile, manufacturers' order books contracted at their fastest rate for almost a decade in April. New orders fell by 4.3 per cent after a 2.7 per cent in March and was the steepest drop since November 1990. The key factor was a record 20 per cent collapse in orders for electronics and electrical goods.

Wall Street surged as traders realised that they may have been premature in pricing in rate rises of as much as one percentage point. The Nasdaq closed up 6.4 per cent to 3,813.4, takings its gains on the week to 19 per cent, while the Dow Jones climbed 1.3 per cent to 10,794.8.

But hopes of an early peak in the interest rate cycle cut the ground from underneath the dollar, which tumbled to a six-week low of $0.9462 against the euro - a fall of more than a cent and half. It fell against all 17 other major currencies including the pound, which broke back through the $1.50 barrier to hit $1.5143.

Nick Stamenkovic, senior bonds analyst at IDEAglobal.com, said expectations of further steep rate rises was a key factor behind the strength of the dollar.

"The fact that interest rate expectations have now improved significantly means the interest rate differential between the US and the eurozone has shifted, removing support for the dollar," he said.

"Today's data rule out the possibility of a 50 basis point hike in June but it would be premature to say that rates have peaked. We see rates rising by a quarter-point in June as a message to the equity markets."

Ian Shepherdson of High Frequency Economics said he was very suspicious of the labour market data. "There is no other evidence to suggest that the jobs market has suddenly gone sour," he said.

He said the market had added the data to figures over the last few days pointing to a slowdown in the economy. "I think that's reasonable. Something has changed but I think the reaction is overdone."