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FX Update: US Jobs growth gains, but wages lag

Written by Howard Wilcox on February 7th, 2017.      0 comments

Although the Non-farm payroll figure on Friday was much better at 227K jobs created for January than the 180k forecasted, the weaker wage growth component unsettled markets, casting doubt on the pace of the recovery and the inflationary outlook. The data suggests a slower path of interest rate increases by the Federal Reserve as the low unemployment rate, according to official data, failed to translate into salary growth. The unemployment rate ticked up to 4.8%, slightly higher than the previous reading and the median forecast of 4.7%, as the participation rate climbed to 62.9% from 62.7%. Similarly, the underemployment rate accelerated to 9.4% in January from 9.2% previously. This inflation outlook side of the Fed’s equation remains a threat to the signal given in December that 3 rate rises maybe necessary in 2017. Market sentiment has swung to a more risk-off stance on uncertainty surrounding the US future, allied with increasing political woes across Europe, sending  investors towards safe haven assets, placing pressure on the EUR but boosting values for gold and the JPY.

The AUD opens the week looking solid and at 0.7660 against the USD, only a tad lower from its multi-week high around 0.7695 posted last week. The Aussie economy is looking more positive with last week's stronger terms of trade data backed up by better local data and continued strength in base metal prices. Gold has also risen above US$1230 oz for the first time this year. The Melbourne institute inflation forecast released early yesterday showed that the CPI is expected to have risen by 0.6% during January, from December's 0.5%, while year-on-year inflation is seen rising by 2.1% against previous 1.8%. As well, job advertisements jumped 4% in January from a 2.2% decline in December, suggesting a rebound in the labour market. We are of the view that this stronger data should provide some comfort to the RBA ahead of today’s policy decision, and expect rates to stay  on hold at 1.50% although there may be some rhetoric around the strength of the AUD.

New Zealand
The NZD remains well supported and should hold close to current levels given the expected neutral tone of the RBNZ statement on Thursday. The economy continues to perform well and although there are risks abroad, with inflation data out later today expected to show a mild increase, the era of record low interest rates ending is fast approaching. The cost of borrowing is already creeping higher on the back of New Zealand banks paying more to source offshore funds, thus serving to tighten monetary conditions outside any action from the central bank.  It appears that PM English had a relatively warm, positive conversation with President Trump but whether this relationship will develop into something that will be enough to mitigate the impact of the new President's economic and trade policies on NZ remain to be seen. News that the RBNZ Governor Wheeler will retire at the end of his term in September had little effect on markets. His Deputy, Spencer will most likely be favoured for the job.

United States
With the more risk tone evident, equity markets traded lower as investors adopted a more cautious view, elevating the value of safe-haven assets gold and the JPY as they await further detail on the timing and scope of the promised pro-growth policies from the new US administration. The disappointing data for wages growth in Friday’s payroll figure saw the S&P500 retreat from near record highs as equity stocks that are tied to growth struggled, not helped by mixed retail sales results which increased concern around consumer confidence. The last few days has seen the initial Trump-fuelled rally in equities falter, as investors assess how the new administration will balance protectionist trade rhetoric with promised tax cuts and spending increases. Simultaneously, traders are assigning greater risk premiums to European countries France and Germany, where anti-establishment movements are gaining traction ahead of elections. Fed officials will be making their first public comments since last week’s policy meeting and jobs data, with the potential to provide insight on how the slowdown in wage growth factors into assessments for the path of inflation. Adding to the uncertainty were comments from US investment bank Goldman Sachs, that the benefits of the deregulation, corporate tax reform and new fiscal stimulus cuts at first thought to outweigh restrictions to trade and immigration may have been overstated.

United Kingdom
Brexit issues continue to dominate UK headlines with attention centred in the ongoing Parliament discussion over the Brexit bill. Policymakers are willing to make amendments to PM May's proposal, but the government said that they will not allow any Brexit legislation that attempts to keep Britain inside the EU. The House will vote next Wednesday, and in the meantime, tensions surrounding the matter will likely keep the Pound subdued. In some positive news for the UK, PWC has published a forecast contending the UK could have the fastest rate of growth in the G7 group to 2050 at 1.9%. A very optimistic assessment but perhaps confirming that many leading City companies are getting used to and even embracing the opportunities Brexit presents. Also providing a more positive tone to the UK economy was data out yesterday showing that new car registrations for January hit a 12 year high last month. Up 2.9%, the highest level since 2005.

The EUR has suffered over the last few days on the more risk adverse tone as political uncertainty comes to the fore. ECB President Draghi commented in an address to the European Parliament, that there was still need for accommodative monetary policy and that he did not view sustained inflation in the Eurozone as an issue. Also, over the weekend German finance minister Wolfgang Schaeuble said the euro exchange rate is "too low" for Germany. With inflation rising to 1.9% in January from 1.7% the month earlier, interest rates at zero and QE ongoing it is understandable that Draghi’s stance on monetary policy is no longer appropriate for the German economy. Political risk is increasing in the region with upcoming elections in France, the Netherlands, Germany and potentially Italy, as anti-establishment parties continue to gain traction. Over the weekend in fact, French presidential candidate Marine Le Pen said she would take France out of the European zone should she win the election, a so called “Frexit”! We expect more EUR weakness as the elections days’ approach.

The Japanese currency was higher as investor flows switched into the JPY as the more risk-off tone became evident. Data out in Japan showed that core consumer prices fell in 2016, the first annual decline since Kuroda took as head of the Bank of Japan with a mandate to end deflation. Adjusting for that drop meant that workers actually got a 0.7 % increase in income last year, which had fallen in real terms in the previous four years. This was seen as positive with the data coming ahead of annual spring wage negotiations between business management and labour leaders. Japan’s employment market is surprisingly tight, with the unemployment rate just a fraction over 3%. Key stumbling blocks here are unions and employees who’ve put job security above pay hikes, low productivity in areas of strong demand for workers, and a growing number of people in contract and part-time roles with little bargaining power.

The CAD has softened towards the end of last week, but comments from the Bank of Canada actually had little effect and the CAD weakness was more about USD strength and the move into assets seen for their safe-haven status. Weaker oil prices also were not CAD supportive. Although Canada’s economy continues to consolidate at higher levels, inflationary pressure remain subdued, suggesting that any monetary firming measures are a way off. On the data front later tonight there is the final trade report for 2016 previously exports were up by 4.3% m/m in dollar terms and 3.9% m/m in volume terms during November. Canadian housing starts for January will come out on Wednesday, and are susceptible to seasonal adjustment factors t this time of year.

Major Announcements

•    Canadian GDP 0.4% vs 0.3% expected
•    NZ employment Change 0.8% as expected
•    NZ unemployment rate 5.2% vs 4.8% expected
•    UK manufacturing PMI 55.9 as expected
•    ISM manufacturing index 56.0 vs 55.0 expected
•    FOMC leaves rates unchanged
•    Bank of England leave rates unchanged
•    US nonfarm payrolls 227k vs 170k expected
•    US average hourly earnings 0.1% vs 0.3% expected
•    Australian retails sales -0.1% vs 0.3% expected