Good morning. The dollar is trading near a two-month high, lifted by three forces pulling in the same direction: a blockbuster payrolls report that has triggered a hawkish reappraisal of the Federal Reserve’s likely policy trajectory, a meltdown in technology stocks, and an intensifying conflict in the Middle East that is raising inflation risks further.
Treasury yields are holding at elevated levels after Friday’s payrolls print convinced investors that inflation remains a bigger risk than unemployment*. The economy added 172,000 jobs in May—more than double the consensus forecast of 85,000—and the unemployment rate ticked lower. Diffusion indices showed more industries hiring than not, a sign of broadening demand, while upward revisions to prior months lifted the three-month average to 188,000 from April’s 48,000, pointing to a sharp pickup in momentum.
The details warrant some caution. Gains remain heavily concentrated in state and local government, healthcare and education, and leisure and hospitality—the last potentially buoyed by preparations for the World Cup. Manufacturing added just 7,000 jobs. Average hourly earnings grew 3.4% from a year earlier, the slowest pace since August 2021 and well behind overall inflation, forcing many households to draw on savings or take on debt to keep spending aloft.
Traders nonetheless now expect the Fed to raise rates at least once this year, and the prospect of higher borrowing costs is colliding with a flood of corporate issuance. SpaceX is set to go public on Friday at an estimated $1.78tn valuation, with Anthropic and OpenAI expected to follow. Google last week announced plans to raise $85bn, and Meta is expected to do the same. The sheer volume of paper hitting the market may partly explain Friday’s sharp equity selloff: the Nasdaq Composite fell 4.2%, its steepest decline since April last year, and the S&P 500 dropped 2.6%, snapping a nine-week winning streak.
Global oil prices are up nearly 5% after Israel and Iran exchanged fire over the weekend, threatening to unravel a tenuous ceasefire and dimming hopes for a reopening in the Strait of Hormuz. Tehran launched multiple waves of ballistic missiles as Israeli forces continued strikes on Lebanon, and Israel hit military targets in western and central Iran even after President Trump urged Prime Minister Netanyahu to show restraint. Prediction markets now put the odds of the strait returning to normal at just 10% by the end of June and 27% by the end of July, suggesting the global oil-supply shock could get significantly worse before it gets better.
It is difficult to see this week’s event risks producing a sharp reversal in the dollar—unless there is a conclusive agreement to end the war, or President Trump jawbones markets into believing one is close**. Inflation data on Wednesday and Thursday are expected to show headline consumer prices climbing more than 4% in the year to May while factory-gate costs hold near 6%, giving Fed officials ample justification for abandoning their implicit easing bias at next week’s meeting and setting the stage for at least one rate hike before year-end. The Bank of Canada is widely expected to hold rates and stay in neutral, keeping differentials tilted against the loonie. The European Central Bank is highly likely to raise rates and open the door to further tightening, but markets have largely priced that in, and euro upside should be limited.
*This tendency to find the cloud in the silver lining reminds me of a CNN headline from a few years ago: “Here’s why the shockingly good jobs report is going to cost you”.
**This underlines what is (arguably) the biggest paradox in markets right now: uncertainty over the Trump administration’s policy direction is suppressing—not raising—volatility expectations, by limiting the extent to which any participant places bets on market direction. The Wall Street Journal’s Greg Ip covered this well in a weekend piece here.