The market’s angst over the underlying trend in the US labor market eases with the help of the second consecutive robust report. The 255k rise in non-farm payrolls was well above expectations, and the details were mostly favorable. There were upward revisions to the May and June reports.
The focus is squarely on the US employment data today, ahead of which the capital markets are mostly consolidating yesterday’s Bank of England inspired moved. The Australian and New Zealand dollars, alongside sterling, which is up about half a cent after losing two yesterday.
The US dollar is consolidating yesterday’s losses. The greenback’s upticks have thus far been shallow and unimpressive, except perhaps against the New Zealand dollar, which is off 0.8% ahead of next week’s RBNZ meeting. Softer than expected labor cost increase reinforces the conviction that a 25 bp rate cut will be delivered next week.
This Great Graphic is deceptively simple. It is chart from the Bureau of Economic Analysis based on the price indices from components of personal consumption expenditure.
The rust line is service prices. They are steadily increasing. No deflation or disinflation here. Think about rent, medical services, education, and entertainment.
August has begun off with clear price action. The US dollar is stronger against nearly all the major currencies. Bond yields are higher. Equities and commodities are mostly lower.
However, outside of the purchasing managers July manufacturing prints, these do not appear to be an overarching story today. Investors are still trying to make sense of last week’s developments, including the BOJ disappointment and the shockingly poor US GDP figures.
The US dollar is trading with a small upside bias in narrow trading ranges. The main news has consisted of PMI reports, while investors continue to digest last week’s developments. In particular, the BOJ’s underwhelming response to poor economic data and a missed opportunity to reinforce the fiscal stimulus, and the dismal US GDP.
Four events this week will command the attention of global investors.
1. The Reserve of Bank of Australia is first. It is a close call, though the median in the Bloomberg survey favors a cut, including most of the banks in Australia that participate in the poll.
The case for it is that price pressures are weakening, and credit growth is slowing. The currency has begun appreciating again, and the Federal Reserve cannot be counted on to lift US rates until the end of the year, at the earliest.
The US dollar advance was stopped in its tracks by the disappointingly weak Q2 GDP figures. The 1.2% annualized growth rate was roughly half of the pace expected. The FOMC statement earlier in the week did not leave the impression that a September hike was likely, and with the poor growth numbers, the odds were downgraded further.
Tomorrow could be among the most challenging sessions of the third quarter. The focus is primarily on Japan and Europe, but the US reports its first estimate of Q2 GDP. After a six-month soft patch that heightened fears in some quarters that the world’s largest economy was headed for a recession, the US economy appears to have returned to trend growth. It enjoyed good momentum as the quarter wound down, and currently, Q3 GDP is also projected to be above trend.
After reversing lower yesterday after the FOMC statement, the US dollar has continued to move lower against the major currencies, save sterling. While the market is not fully confident of a rate cut by the Reserve Bank of Australia, indicative pricing in the derivative markets suggest a UK rate cut has been fully discounted (and a new asset purchase plan may be announced).
