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FX Update : September Fed rate hike odds reduce after US August payrolls data

Written by Ian Dobbs on September 6th, 2016.      0 comments

3:30pm(NZT)
Overview
Friday’s weaker than expected August US Nonfarm payrolls report ,saw the addition of 151k jobs, has seen the market move to lower the odds on the expectations of Fed rate hikes this year. The move lower was only marginal however, from 24% to 21% in September and also 3% by December to around 50%. The meeting on September 21st will be an interesting one. The “breakeven” pace that Fed officials believe is consistent with unchanged labour market slack in the medium term is less than 100k per month, a number which has been easily outstripped given the 2016 year-to-date average gain of 182k. Comments from Fed Chair Yellen at Jackson Hole also may point to a potential underestimation by the market for a move this month given that her words “ in light of the continued solid performance of the labor market” and that the data must “continue to confirm” appear to indicate a predisposition that the outlook is on track, a view which Friday’s data looks unlikely to change.

 
Australia
The Australian dollar has started this week on a positive note after Friday’s weaker than expected US employment data drove the greenback lower in trade to end the week. Data last week included further numbers from the retail sector which pointed to a loss of momentum, partly on the back of weak price inflation- although the trend points to rising consumer concern over household debt and the economy in general. HIA new homes sales fell sharply in the latest read,although building approvals for July rose by the most in two and a half years on the back of a leap in new apartment plans. However, emerging oversupply and weakening conditions in the apartment market cast doubt on the number of projects that will proceed to completion. The decline in Private Capex numbers reported for the second quarter was driven by the mining driven engineering and construction slump and aligned closely with the quarter’s soft construction data. Numbers from the private sector showed credit rising in line with expectations, although housing credit growth showed a continued loss in momentum (led by investor finance). Focus for this week starts with today’s RBA decision (no change expected) and tomorrow’s Q2 GDP report. Other numbers include trade data for July, and numbers on home lending, whilst yesterday saw the release of stronger than expected company profit data for Q2.
 

New Zealand
Last week was a quiet one for the NZD which saw the market in limbo for much of the week ahead of Friday’s key US Nonfarm payrolls employment data. A lower than expected gain in jobs for the month and a decline in average hourly earnings growth saw the USD marked lower after the release and market pricing for a Fed rate hike later this month ease to 21% (from 24% prior). Data released locally last week started with the volatile building consents series which eased sharply from the month prior. ANZ business confidence was barely changed in August, although a notable rise in confidence in the agricultural sector was seen on the back of the recent gains in dairy prices. Terms of trade data for the second quarter which included the earlier prior slump in dairy prices were understandably soft although strong export volumes was a positive in the series. Attention for this week will start with eyes across the Tasman today as we look to the RBA cash rate decision. Dairy pricing will then be in focus overnight where current expectations are for another jump in pricing (WMP +7 to 9%). Other releases include numbers on sales from the manufacturing and retail sectors, although these won’t provide more than a passing interest.
 

United States
Holiday trade has ensured a quiet start for the USD this week due to a bank holiday Monday. This comes after Friday’s miss in the August Nonfarm payrolls employment data which led to a marginal reduction in the markets expectations for Fed rate hikes in 2016. Jobs were shed in manufacturing and construction, whilst earnings growth which was seen slowing down to 2.4% y/y (from 2.7%) points to little need for urgency from the Fed when they meet later this month. Data earlier in the week included numbers on personal income and spending which boded well for the momentum in Q3 and consumer confidence which lifted in August. Pending home sales rose by more than expected in July although both the Chicago PMI and ISM PMI indicators of manufacturing activity were seen underperforming their consensus expectation. The Fed’s preferred inflation gauge (the core private consumption deflator), which was stable at 1.6% y/y, remained at the level it has been for months and indicates little upwards pressure on inflation. Data this week will start with today’s ISM Non-manufacturing numbers and composite/services PMI reads in what should be a quieter week overall.


United Kingdom
The pound has continued to remain in demand this week after it built on the gains from last week yesterday after the release of the August services PMI which jumped by the largest amount on record from the month prior. The data easily beat expectations and added to Friday’s construction PMI read (that rose by the most since 2013) and Thursday’s manufacturing PMI read that rose by 5pts (to 53.3), which was the largest monthly gain in 25 years. Data on house prices that posted a moderate gain in August added to the positive sentiment and helped the sterling to top the G10 leader board during the week. The data overshadowed other numbers of less interest which included weaker than expected numbers on mortgage lending and mortgage approvals. Data to watch this week starts with tomorrow’s manufacturing and industrial production figures. Halifax house prices will also feature tomorrow, although the later speech from BoE Governor Carney and inflation report hearings look likely to be centre stage on the week.

 
Europe
This week’s focus in Europe is on Thursday’s ECB interest rate decision which sees the market anticipating a move by the central bank in order to offset falling inflation expectations across the currency union. The prospect of a further cut to rates looks unlikely which will leave an extension to the current QE programme as the most feasible option. Included in the data last week were weak inflation numbers, which highlights the difficulty faced by the ECB. Other numbers included business climate and consumer confidence numbers that were soft, whilst PMI indicators from the manufacturing sector were mixed as weaker activity in France and Italy offset an unchanged positive 53.6 read in Germany. The data led to a marginal dip in the EU print which were followed by numbers yesterday which saw the EU composite PMI fall to 52.9, a result that was both 0.4 pts below expectations and the month prior. The fall was driven by weakness in the German services and composite reads and comes on the back of the weaker August German IFO data.


Japan
The Yen has had a firm start to the week rising yesterday after a speech from BoJ Governor Kuroda which failed to offer hints on more easing later this month and was notable for its absence of the ‘2 year timeframe target’ for returning inflation to the 2% goal. Last week saw the Yen ease to five week lows against the greenback on the back of hawkish Fed leader commentary at Jackson Hole and on those comments of Governor Kuroda which spoke of a willingness in boosting stimulus if required. Data included releases on retail sales, household spending and unemployment- which all outperformed their estimates. Disappointments came from the latest industrial production and construction order data, although housing starts which jumped 8.9% y/y in July was well above expectations. Data this week has started with average cash earnings which were in line from the period prior although local focus will be on Thursday’s GDP and current account data (less so).
 

Canada
The Canadian dollar has strengthened in recent trade on the back a lower USD after Friday’s US data and on the back of oil prices which advanced in trade yesterday. Crude prices settled higher on the back of news out of the G20 that Russia and Saudi Arabia would set up a working group to monitor the oil market which would make recommendations aimed at promoting price stability. Data last week was led by numbers on growth which expanded in the latest monthly read on the back of resuming oil sands production. Current account data for the second quarter was again poor, although was marginally better than expected. Data on monthly Merchandise trade showed a contraction from June’s record deficit on the back of export volumes which increased 3.7%. Labour productivity numbers for Q2 which declined by the most this year reflected the temporary shutdown of several oil facilities during the Alberta wildfires. Interest this week will centre on the BoC interest rate decision on Wednesday (no change expected) and Friday’s August employment data.
 

Economic Events.
  • NZ Building Permits s.a., -10.5% m/m vs. 21.9% prior (Jul.)
  • German Harmonised Inflation, -0.1% m/m vs. 0.1% exp. (Aug.)
  • Japanese Industrial Production, 0.0% m/m vs. 0.8% exp. (Jul.)
  • Australian Private Sector Credit, 0.4% m/m as exp. (Jun.)
  • EU Inflation, 0.2% y/y vs. 0.3% exp. (Aug.)
  • Canadian GDP, 0.6% m/m vs. 0.4% exp. (Jun.)
  • US Chicago PMI, 51.5 vs. 54.0 exp. (Aug.)
  • Australian Retail Sales s.a., 0.0% m/m vs. 0.3% exp. (Jul.)
  • UK Markit Manufacturing PMI, 53.3 vs. 49.0 exp. (Aug.)
  • US ISM Manufacturing PMI, 49.4 vs. 52.0 exp. (Aug.)
  • UK Construction PMI, 49.2 vs. 46.1 exp. (Aug.)
  • US Nonfarm Payrolls, 151k vs 180k exp. (Aug.)
  • US Unemployment Rate, 4.9% vs. 4.8% exp. (Aug.)
 

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