Dollar Gains Support from Labor Report

CURRENCY FUTURES

The USD index gained strength following May’s labor report. The resilient labor market in the US reinforces expectations that the Fed will not cut rates anytime soon, offering support for the dollar. Trade uncertainty and worries over the US economic outlook continue to contribute to near-term volatility. Future dollar movements will depend on trade developments and investor sentiment.

Euro futures are lower on a stronger dollar. German industrial output contracted 1.4% month-over-month in April, with goods exports to the US falling 10.5% and total exports out of Germany falling 1.7%, reflecting the post-tariff impact on companies in Germany. Eurozone GDP figures showed the economy grew at 1.5% on an annualized basis, while quarterly growth for Q1 was 0.6%; both figures beat expectations. Meanwhile, retail sales in April grew by just 0.1%, below estimates of 0.2% and lower than the previous month’s reading of 0.4%.

The European Central Bank cut its benchmark interest rate by 25 bps to 2.00% Thursday, a response to slowing inflation and threats from President Trump’s tariffs on the region’s growth. ECB President Christine Lagarde said in a press conference following the decision that the central bank is likely “getting to the end of the monetary-policy cycle.” Markets are now pricing in only one more rate cut by the end of the year.

British pound futures are lower, pressured by dollar strength. House prices contracted 0.4% in May, below expectations of 0.4% growth and lower than April’s 0.3% growth, per new data. Construction PMI data for the month of May came in just above expectations at 47.9 and higher than the previous reading of 46.6, indicating construction activity shrunk at a smaller pace in May than in April. The Bank of England’s governor, Andrew Bailey, said Tuesday that the bank will continue to cut rates, but the extent to which and the timing remain in question. Markets are pricing in two interest rate cuts this year, with the base rate expected to land at 3.75%.

Yen futures are lower following weak household spending figures and a stronger dollar. Household spending in Japan contracted 1.8% month-over-month in April as data showed a fourth consecutive monthly decline in real wages. Additionally, inflation in the country has continued to outpace nominal wage growth, pressuring consumers. This trend has heightened concerns about Japan’s economic outlook, particularly amid growing global uncertainty driven by rising US tariffs. The weak wage and spending figures complicate the Bank of Japan’s efforts to move toward policy normalization. Bank of Japan Governor Kazuo Ueda said that interest rate hikes will be on hold until economic and inflation forecasts are met.

Australian dollar futures are lower, pressured by greenback strength. New trade balance data showed a drop in exports and a rise in imports for the month of April. Exports contracted 2.4% month-over-month, while imports grew 1.1%. GDP grew 0.2% quarter-over-quarter in Q1 2025, down from 0.6% growth last quarter and below the forecasted 0.4%. GDP in the country grew at its slowest pace in three quarters, while annual GDP rose 1.3%, short of the 1.5% estimate. The lower-than-expected reading supports the Reserve Bank of Australia’s latest meeting minutes, which suggested the bank will be ready to deliver more rate cuts to counter weak economic growth.

STOCK INDEX FUTURES

Stock index futures are higher following a better-than-expected May labor report. Nonfarm payrolls for the month of May increased 139,000, beating estimates of 126,000 and lower than April’s figure of 147,000, showing that hiring slowed in May. The data signals that the labor market has remained resilient in the post-tariff economy, although signs that businesses grew more cautious about hiring amid the economic uncertainty they face when planning appeared. The unemployment rate held steady at 4.2%, while average hourly earnings rose 0.4%, above expectations and last month’s figure of 0.3%. Revisions showed employers added a combined 95,000 fewer jobs in March and April than previously estimated.

The JOLTS job openings report showed job openings for April rose by 191,000 to 7.391 million. Layoffs also rose by 196,000, the biggest rise in nine months, but remain relatively low by historical standards.

President Trump and Chinese leader Xi Jinping spoke over the phone Thursday morning, offering hope for an easing in tensions between the two countries’ trade standoff. Trump said in a social media post after the call that it resulted in a “very positive conclusion.” He said Treasury Secretary Scott Bessent, Trade Representative Jamieson Greer, and Commerce Secretary Howard Lutnick would hold a follow-up meeting with their Chinese counterparts.

Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 22 times their expected earnings over the next 12 months, as of May 30, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.

INTEREST RATE MARKET FUTURES

Futures are lower following May’s labor data. The resilient labor market reinforces the Fed’s wait-and-see approach to monetary policy while the larger inflation picture plays out. However, cracks in the labor market are starting to show a cooling; revisions to March and April’s data showed employers added a combined 95,000 fewer jobs than previously estimated. Additionally, the JOLTS report showed that layoffs ticked higher in April. A monthly survey from Challenger, Gray & Christmas this week reported 94,000 US job cuts in May, up from 64,000 in the same month last year. So far in 2025, US firms have laid off 80% more workers than in the same five months last year. Markets are expecting 50 bps of easing this year from the Fed, with the first rate cut coming at the September meeting.

The Fed reported in its Beige Book on Wednesday that US economic activity has declined and that tariffs have put upward pressure on prices. The Fed said the economic outlook for the US remains slightly pessimistic and uncertain, unchanged relative to its previous report. In January, all 12 Fed districts reported economic growth; the latest report showed just three did, while half reported economic declines. Meanwhile, most districts reported employment as “flat.” The report suggests that both inflation and the labor market are deteriorating to some degree.

The 10-year Treasury yield is 4.47%, and the 30-year yield is hovering around 4.93%. The spread between the two- and 10-year yields fell to 44 bps from 47 bps Thursday, as the yield curve flattens with the two-year yield rising above 4% for the first time in weeks.

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