The non-farm payrolls report on Friday showed a United States economy adding more jobs than economists forecast, with 252,000 new additions versus 230,000 expected. Despite a dip from November’s stellar 353,000 the numbers for 2014 in aggregate constitute the best year of job creation since 1999. Let me repeat that, the best year of job creation in 15 years! Very impressive, and for the data junkies, that’s just shy of 3 million jobs created in 2014. However as I mentioned last week, perhaps the key variable to watch going forward is wage growth, and average hourly earnings actually fell 0.2%, despite expectations of a 0.2% rise. You might say that because of the tepid wage growth the Fed might be willing to sit back and wait, but there’s nothing a central bank hates more than to be behind the curve and reacting to events. For my money, the risk remains that the Federal Reserve will hike rates sooner rather than later. You simply can’t disregard those sort of job creation numbers!
But what happened to the financial markets when the news came out? Here’s a quick run through:
• S&P 500 (my preferred proxy for global equity markets) – rose the initial half hour after the number, posting a new year to date high, before subsequently giving up 1.5% from the highs.
• EUR/USD (for currencies you have to at least look at the euro and Japanese yen, that way you stand a better chance of eliminating non-dollar factors) – fell 0.5% in the first half hour, but subsequently rallied into the close on Friday. To be clear… the dollar appeared to strengthen initially, but then sold off into Fridays close, losing all the gains and more.
• USD/JPY – rose 0.6% in the first half hour, but then subsequently reversed, giving up all the gains and more, into the close. Again.. as with EUR/USD, the dollar rallied initially but lost all the gains and more.
• Oil – the intra-day downward trend that was already in force on Friday continued after the number. It’s difficult to say what impact the US data had in this case.
• 10 year Bond yields – fell after the number
• September 15 Eurodollar (for those unfamiliar with this instrument, this is a future which roughly predicts where US interest rates will be in September) – rallied after the number, climbing about 6bps. Although the market is pricing in a 25bps hike by September, this move went some way to taking out any possibility of anything more than that.
There you have it. I’m tempted to annotate the price action above by saying something like… in the tug of war between euphoria that wage growth remains tepid, and therefore the Federal Reserve will remain in wait-and-see mode, and the realisation that the labour market is getting too tight and Fed officials will be forced to act even if wage growth remains stagnant, the pragmatists are winning. Why are the pragmatists winning? The unemployment rate is 5.6%, the Federal Funds Rate is at 0.25%. If wage growth picks up suddenly the central bank will be forced to hike reactively. For all the nonsense over the last few years about fear of deflation… trust me.. the real nightmare is when inflation gets out of control on the way up. History will look poorly on an institution that continued with a policy of zero interest rates while the unemployment rate approached levels which have historically signalled full employment.
There really is no macro data worth bringing to your attention today. We remain in a situation where energy prices are under pressure, the US dollar has taken a pause for breath, indeed against most currencies around the world, it is slightly less expensive in the last week, and equity markets are in wait and see mode. European currencies dance to their own regional beat, whether it’s the UK with the onset of election mania, and the possibility of no clear winner and no viable coalition partner; or the Eurozone with a crucial Greek election in a fortnight; the result is a real risk of outcomes which could adversely impact European currencies, hence the market is extracting an appropriate discount. Here at ParityFX, our base case remains that the bullish US dollar trend is likely to be a powerful multi-year phenomenon which like a runaway train will leave collateral damage all over the macro landscape. Yes there will be periods like the last few weeks where the trend pauses, but don’t mistake that for anything other than what it is… a pause.
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