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FX Update - US employment data disappoints

Written by Ian Dobbs on October 6th, 2015.      0 comments

Market Overview:
The market is getting more and more confident that we will see further easing measures out of both Europe and Japan. The soft growth and inflation outlook in both economies is likely to pressure their respective central banks to act again, potentially as early as later this month. The US Fed on the other hand desperately wants to hike interest rates off the ‘zero bound’ but have been held back by the global environment and now potentially by domestic data. In the wake of Friday’s US employment data the odds of a December interest rate hike have diminished. When the Fed do eventually get around to hiking interest rates it could be easily be the start of another emerging market crisis. The IMF recently warned it could trigger a wave of emerging market corporate defaults, setting off panic in financial markets as liquidity evaporates. In this environment the markets will remain vulnerable to swings in risk sentiment and we can expect plenty of volatility over the foreseeable future.
At the end of last week we got the latest reading of retail sales from Australia. Retail sales grew 0.4% in August which was right on expectation. With all the negative sentiment around the outlook for the Australian economy at the moment there was probably some relief it didn’t print weaker than forecast. Attention now turns to this afternoon’s RBA meeting outcome. There is no expectation for any action from the RBA today, but many forecasters are suggesting we could see further easing late this year or sometime in 2016. So the market will be closely analysing the statement to see if the central bank is shifting to a more ‘dovish’ stance from their current neutral policy setting. The market may be starting to get ahead of itself with expectation for further easing’s from the RBA. Governor Stevens has previously made it clear that the bar for further interest rate cuts is set quite high, and he’s not convinced there would be all that much benefit to the economy. They certainly have room to move if the global, and domestic, situation declines further, but I suspect we’re not close to that threshold just yet. The economy is transitioning away from mining led investment and growth, it’s just happening slower than everyone would like and the global environment isn’t helping much. If we do get another very neutral statement from the RBA the Australian dollar may well react positively.

New Zealand
The only data of note from NZ last week was ANZ business confidence which saw an improvement from the six year lows that printed prior. In the past couple of hours we have seen the latest reading from the NZIER’s quarterly survey of business opinion. It has declined from a prior reading of +5 in Q2 to -14 in Q3. That is its lowest reading since 2011. The drop in confidence is however in contrast to firms own activity with a net 12% reporting an improvement in trading activity over the past quarter and a net 17 percent expecting a further improvement over the coming quarter. The only other data that will draw attention this week is tonight’s dairy auction. Expectation is for another positive result which would be very encouraging considering the past three auctions have delivered double digit growth.

United States
Data from the United States last week was less than inspiring and Friday’s release of key employment data was even worse. The market was keenly anticipating Friday’s data in the hope it would largely confirm a December interest rate hike from the Fed was likely. On that level it has fallen well short. In fact it’s now started to raise serious doubts about the chance of a Fed interest rate hike this year. The non-farm payrolls figures were universally disappointing. The headline figure was much softer than expected at just 142k. Forecasts had been for 200k+. On top of that there were significant negative revisions to prior numbers and wage growth was flat, against expectations of a 0.2% gain. The only positive thing you can say is that the unemployment rate stayed steady at 5.1%. But even then it was only because the participation rate declined to levels not seen in nearly 40 years. There are now 95 million working age Americans not included in the labour force. This was only one month's data and it can be volatile, so we must be cautious about reading too much into one print, but barring a sharp rebound next month, it’s going to be very hard for the Fed to hike into weakening employment growth figures. The US dollar initially saw pressure on the back of the release, but much like after the last Fed meeting, it rebounded sharply back close to unchanged by the end of the session. It is however getting harder and harder to justify why the USD continues to find so much support. Last night’s release of non-manufacturing PMI data was also a little disappointing falling to 56.9 from 59.0 prior. The overall level of the index is still healthy and the employment component actually improved, but the declining headline reading has only added further doubt to potential Fed action in December. Still to come this week we have the trade balance, the Fed minutes and a number of speeches from officials to digest.  

United Kingdom
Over the past few trading days we have seen PMI data from the manufacturing, construction and services sectors of the UK economy. Manufacturing PMI was largely unchanged and very close to expectation at 51.5, while the construction reading made solid gains to print at 59.9. This suggests construction firms would have enjoyed a very strong finish to the third quarter. Residential construction grew at the highest rate for a year and the employment component of the PMI was also very strong. Countering all this however was the release last night of service sector PMI which accounts for three quarters of the UK economy. It fell to 53.3 from 55.6 prior. The market was expecting a gain to 56.4. This is the lowest print since April 2013 and it seems uncertainty about the global situation has impacted activity to a degree. A reading like this would be consistent with GDP slowing at touch toward 0.5% from 0.7%. Still to come this week we have manufacturing and industrial production data, along with the Bank of England interest rate meeting. The BOE are not expected to adjust policy settings at all and after the Fed decided to hold off hiking rates a couple of weeks ago we may well find the BOE are sitting on their hands for some time yet as well.

European Central Bank President Mario Draghi made it very clear recently that the bank is more than willing to ease policy further if economic conditions warrant it. The market currently expects further action from the ECB and data over the past week is certainly heading in the right direction to prompt it. Last week we saw inflation data dip back into negative territory and on Friday we got another soft reading from producer prices. The PPI printed at -0.8% against expectations of -0.6%. Energy prices were obviously a big part of that decline, but even the PPI ex-energy reading fell to -0.2% from 0.0% prior. It seems there may well be further downside pressure on inflation in the pipeline. Euro area PMI’s also mostly declined in September with the composite reading falling to 53.6 driven by weakness in the service sector. Over the coming days we get data on German factory orders and industrial production along with the ECB meeting minutes. These will be closely analysed to get a better feeling of just how far away the central bank is from announcing further easing’s. The ECB will probably be forced to act again at some stage late this year or early next, but with negative interest rates and quantitative easing already in place, what more can they really be expected to do, and is it likely to make any real impact? Draghi has said many times there is a limit to what central bank can do. The world tends to look toward central banks these days to underwrite growth, but they only have a few blunt instruments to work with. Governments are the ones who can really stimulate growth and put policies in place for the long term benefit of the economy. We’re just not seeing this in Europe at the moment.

The Japanese economy is struggling to gain traction and continued soft inflation is keeping speculation over more quantitative easing alive and well. Tomorrow we have the latest Bank of Japan interest rate meeting and it’s going to be an interesting affair. There isn’t much expectation for further action from this meeting, but it’s fair to say there is growing expectation for more QE over the coming months. Last week’s Tankan survey result will have done nothing to ease fears that the Japanese economy could well slip back into recession over the coming months. Retail sales and industrial production figures last week also undershot expectation as did wage data released yesterday. All this will leave the BOJ very concerned about the outlook for growth and inflation. Governor Kuroda may well continue to put on a brave face at tomorrow’s meeting, but there is real pressure, and expectation, for them to act at their next meeting on October 30th. The Japanese Yen should remain vulnerable in this environment.

There has been little of note released from Canada since last week’s better than forecast GDP result. A slightly better commodity picture, particularly for oil, has helped to support the Canadian dollar in recent sessions and we now look forward to a number of key releases over the coming days. The trade balance, Ivey PMI, building permits, the new house price index and employment change are all set to hit the wires before the weekend.

Major Announcements last week:
  • NZ Business Confidence -18.9 from -29.1 prior
  • Australian Building Approvals -6.9% vs -1.8% expected
  • UK Current Account -16.8b vs -22.2b expected
  • Canadian GDP 0.3% vs 0.2% expected
  • Chinese Manufacturing PMI 49.8 vs 49.7 expected
  • UK Manufacturing PMI 51.5 vs 51.3 expected
  • US ISM manufacturing PMI 50.2 vs 50.8 expected
  • Australian Retail Sales 0.4% as expected
  • UK Construction PMI 59.9 vs 57.5 expected
  • US Non-Farm Payrolls Chance 142k vs 201k expected
  • US ISM Non-Manufacturing PMI 56.9 vs 58.0 expected
  • UK Services PMI 53.3 vs 56.4 expected
  • NZIER Business Confidence -14 from +5 prior.