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FX Update: Markets react positively to the latest US employment data

Written by Ian Dobbs on July 12th, 2016.      0 comments

Friday’s June US employment report had been widely anticipated by the market last week. The adding of 287k jobs for the month gave the market yet more reason to push equities higher as the S&P 500 reached a new record on Monday. The Goldilocks report was seen as neither too strong or too weak by the market as it assuaged concerns that the US may be heading for a slowdown, this as May’s poor jobs number saw the market slash the remaining odds of 2016 Fed rate hikes. Brexit concerns had only caused to push those expectations even lower in recent weeks. Friday’s data did see expectations push up to around 20% for a hike by December however and it remains to be seen given the economic and political cracks appearing globally whether the continued surge in many global equity indices is misplaced.

Counting from last weekends’ Federal election which continued over the weekend has seen the Liberal Coalition retain power and return enough seats to form a majority government, albeit with a slender majority in the lower house. Economic events from last week were led by the cash rate decision which saw the RBA maintain rates at 1.75% as expected and point to the potential for further cuts should inflation remain low. A fall in the latest building approvals numbers was noted, whilst the latest retail sales data pointed to a slowing in momentum. National house price momentum was also seen slowing with lopsided strength in the key cities of Sydney and Melbourne being offset by declines in four of the other capital cities. ANZ jobs ads pointed to reasonable jobs growth although a better indication on the labour market will come on Thursday as the ABS releases the monthly employment figures. Other data this week includes NAB business confidence this afternoon and figures on consumer sentiment on Wednesday. Data released yesterday showed home loans falling by less than expected whilst the value of total housing lending was seen rebounding sharply after April’s decline.

New Zealand
Last week was a quiet one for market moving economic data in NZ. Releases included the latest quarterly NZIER business confidence survey which rose to a net 19% who foresaw an improvement in their trading activity, led by strong confidence in the construction and services sectors. QV house price data showed continued strength in house prices across the country whilst the latest GDT dairy auction was disappointing as prices continued to languish (0.4% decline overall). Strength in the local currency was seen running into the end of the week on the back of stalling by the RBNZ to announce fresh macro-prudential measures to curb investor activity in the housing market, and an acknowledgement by them that further cuts to the OCR would only present further risks. Near 14 month highs (vs. the USD) were seen by the close of the week on the back of the solid US employment report which ignited a rally in risk assets and the commodity currencies. Some normalcy has been restored this week as the USD has begun to rally as would have normally been expected on the upside data surprise. Look once again to offshore leads to drive the NZD this week during a quiet week which has so far featured electronic card retail sales (released yesterday) which rose by more than double that forecast. The data had no impact however, expect Thursday’s business PMI indicator and tomorrow’s food price index to offer little also.
United States
Events last week were dominated by the highly anticipated Nonfarm payroll employment release. The June numbers came in well above expectations as they rebounded sharply from May’s disappointing read. Average hourly earnings remained soft however and the vast majority of jobs were added in the 55 and over age group. The data was enough to see the S&P 500 rally 1.5% to new nominal highs and the US 10-year yield fall to 1.35%, a new low. Expectations for a rate hike in 2016 remain low however although almost doubled to around 20% (by December) after the data. The Fed minutes passed without too much fuss as Brexit concerns and the desire to maintain the flexibility to hike rates was aired. Other data released earlier in the week included the ISM service sector index which jumped well above expectations whilst the factory orders data and latest services PMI number marginally underperformed. Data this week includes the Fed’s Beige book and JOLTs job openings before the more key inflation and retail sales releases on Friday (amongst others). Various Fed members will also speak over the course of the week.

United Kingdom
Sentiment which was once again undermined by the Brexit uncertainty helped the GBP fall to fresh lows against the greenback in trade last week. British equities were volatile during the week as the FTSE 250 continued its post EU vote plunge. Sentiment took a further kick from UK property funds which froze investor redemptions, and as the IMF warned over the impact to UK GDP of an EU exit. Focus was also on the BoE. Governor Carney announced the removing of the counter-cyclical capital buffers on UK financial institutions in order to boost the lending capacity of commercial banks. The BoE will remain in focus this week as the bank meets on meets on Thursday to discuss rates. Expectations are varied on whether a cut will be delivered to bolster sentiment post the Brexit vote, especially given that the drop in the currency and fall in interest rates already seen has delivered a significant easing. An alternative viewpoint in the FT notes that hard economic data will not be available until September and that the BoE MPC will need to rely as they did in 2008 on reports received from the bank’s agents around the country, and that these reports will likely indicate the need to cut to avert a Brexit slowdown. Data released last week was mixed and included misses in the latest construction and services PMI data and better than expected indicators on trade and industrial/manufacturing production.

European banks were in the spotlight last week as focus remained on a fragile Italian banking system which is straining under the weight of ~EUR 300Bn of bad debt. The chief economist of a leading German bank has called for a ~EUR 150Bn bailout of European banks as they struggle with high debt and low Eurozone growth and deflation. Data released last week included German factory order and industrial production numbers which disappointed markedly. Composite and services PMI numbers all either matched or exceeded their consensus in the key countries of France and Germany, and across the wider Eurozone. German trade numbers for May disappointed and were led by a sizeable fall in the export balance. Data this week has started with Italian industrial production numbers which missed their estimates (although passed without fuss) yesterday. The remainder of the week will see the release of regional inflation data starting with Germany today and will conclude with the read for the wider Eurozone on Friday. Other numbers to feature include Eurozone trade and industrial production.

Elections have dominated the news in Japan over the weekend as voters went to the polls to choose the upper house of parliament. The result has seen PM Abe’s ruling coalition win a majority as it gained 2/3 of the upper house in a result which suggests Japanese voters see no other viable alternative to ‘Abenomics’ for beating inflation. The PM said yesterday that he would use the victory to push his economic reform program (‘Abenomics’) to bolster inflation with fresh fiscal stimulus spending amounts of up to JPY10 trillion being suggested by the Japanese papers. The news sent the Nikkei 225 up nearly 4% and the Yen sharply lower in trade yesterday. Numbers on core machinery orders did little for the Yen’s cause as they continued the weak trend when released yesterday. Other indicators of interest this week include the Tertiary Activity Index later today and numbers on industrial production and capacity utilization tomorrow. None are expected to cause any more than a passing interest for the market however. Data last week was sparse and included the May current account which came in close to expectations and banking lending which eased marginally from the month prior.

Falling oil prices has continued to weigh on the fortunes of the Canadian dollar in recent sessions. The move comes on the back of a higher US oil rig count, rising Canadian supplies and cuts in bullish hedge fund bets on the price of crude. Data last week was led by the June employment release which saw the unemployment rate decline to a 11 month low as labour participation fell to its lowest since Dec 1999. The disappointing data saw employment fall slightly during the month although any job gains were part-time in nature and came at the expense of a large fall in the full-time component. Other data included manufacturing PMI numbers which eased from the month prior and trade data which again showed the deficit around record levels. The BoC business outlook survey revealed a soft assessment of business conditions ahead as oil spending remained depressed. Data on the building sector showed issued permits falling well short of expectations in May whilst the Ivey PMI was noted lifting from the month prior. Housing starts released overnight easily beat expectation although focus for this week will be on the BoC monetary policy report on Wednesday.

Economic Events (Tuesdays only)
  • Australian Building Permits, -5.2% m/m vs. -3.3% exp. (May)
  • UK PMI Construction, 46.0 vs. 50.5 exp. (Jun.)
  • NZ Q2 NZIER Business Confidence, 19% q/q vs. 2% prior.
  • Australian Retail Sales s.a., 0.2% m/m vs. 0.3% exp. (May)
  • Australian Cash Rate, 1.75% as exp.
  • NZ GDT Dairy Prices, -0.4% vs. 0.0% prior.
  • EU Markit PMI Composite, 53.1 vs. 52.8 exp. (Jun.)
  • US ISM Non-Manufacturing PMI, 56.5 vs. 53.3 exp. (Jun.)
  • UK Manufacturing Production, -0.5% m/m vs. -1.0% exp. (May)
  • Canadian Ivey PMI s.a., 51.7 vs. 50.2 exp. (Jun.)
  • US Nonfarm Payrolls, 287k vs. 175k exp. (Jun.)
  • US Average Hourly Earnings, 2.6% y/y vs. 2.5% prior.(Jun.)
  • Canadian Unemployment Rate, 6.8% vs. 7.0% exp. (Jun.)