Rates as of 05:15 GMT

Market Recap

Friday’s blowout nonfarm payrolls sent the dollar up overall. The 224k rise in payrolls beat the 160k estimate by far – it was higher than the highest estimate on Bloomberg (220k) and compared with the “whisper” figure ahead of time of 133k, which is probably a better indication of where the market thought the figure would come in. After revisions, the average of the last three months is now 171k, which compares with 174k three months ago – i.e., no change in the recent trend. While that’s down a bit from the end of 2018, it’s about the same as it was in 2017, and no one was talking about the need for a rate cut back then.

The immediate impact of the figure was to eliminate the possiblity of a 50 bps “insurance” cut at the July 31st FOMC meeting. The market still expects a cut, but only 25 bps. Previously, the market had been pricing in a 32 bps reduction in rates then, indicating one cut and around a one-third chance of a 50 bps cut.

The news wasn’t all good, however. The unemployment rate ticked up to 3.7% from 3.6%, although that was largely due to rounding – at two decimal places, it only moved to 3.67% from 3.62%. And even that may have been good news in fact – the participation rate also ticked up to 62.9% from 62.8%. Average hourly earnings and average weekly hours were both unchanged (at +3.1% yoy and 34.4 hours, respectively). The average hourly earnings figure is particularly disappointing – it was up only 0.2% mom, even though various calendar effects should’ve made for a higher reading. The six-month annualized growth in earnings is now just 2.7%, the lowest since March of last year.

The Fed’s decision won’t be based entirely on the employment report, of course. Thursday’s CPI figures and next week’s retail sales will also be important in determining their views on the outlook for the US economy. Plus of course they will take into account “international developments,” as they pointed out in the statement following the June meeting. As a result, it’s still possible that they cut rates even if payrolls are rising. The June statement said that they would “act as appropriate to sustain the expansion…” Chair Powell said at the press conference following that meeting that "an ounce of prevention is worth a pound of cure," meaning that when rates are close to zero already, "it's wise to react...to prevent a weakening from turning into a prolonged weakening." In other words, maybe they have to act before payrolls begin falling, not afterwards. Watch for Powell’s testimony to Congress on Wednesday and Thursday and the minutes from the FOMC meeting, which come out on Wednesday.

In contrast to the surprisingly strong US payroll data, German factory orders (Friday) and industrial production (this morning) have been disappointing. Factory orders were down 2.2% mom vs -0.2% expected, while industrial production was up only 0.3% mom vs +0.4% expected. The orders figure in particular presages further weakness in output in coming months. EUR negative

On the other hand, the German trade surplus beat expectations at €20.6bn vs €17.0bn expected (€17.9bn previously) so perhaps that will keep the political pressure on the euro to appreciate. Even if the US-China trade talks are resolved soon (which seems doubtful), the US-EU talks about autos are likely to be complicated and a continuing source of uncertainty for the markets. The impact on the euro is likely to be mixed, however. On the one hand there will indeed be some political pressure on the euro to appreciate. On the other hand though, the result of the talks is likely to be less European exports to the US and more US exports to Europe, which should mean a weaker euro. I think though that in the short term, politics are likely to win out and the trade talks may be positive for the euro.

The Commitments of Traders Report is coming out tonight. It was delayed because of the Independence Day holiday in the US.

Today’s market

All the important indicators for the day are out already, so this part can be relatively short. In fact there’s nothing left on the schedule for today.

Overnight we get the disgraced Japan labor cash earnings. These should be important, because they show whether the nation’s tight labor market is translating into higher wages for workers. But the scandal with government not collecting all the data it was supposed to, plus the bogus investigation into the scandal, followed by a change in the data sample that sent the figure crashing, has meant that the data lost whatever miniscule importance it ever had. Now it’s just watched by data nerds like me who like to track this sort of thing. It’s expected to show earnings falling at a faster pace than in the previous month, which is pretty bad – perhaps they have an inverted Philips curve? It looks like wage pressures will never bring inflation back to Japan. Perhaps the BoJ will have to loosen further eventually. BoJ Deputy Governor Amamiya said to Reuters last week that it was still possible, if it becomes necessary. But he also said that “For now, our baseline scenario is that Japan’s economy will continue to expand moderately and gradually push up inflation to our target.” Hmmm…seeing as the last time inflation was at their 2% target was 1992, maybe people are beginning to doubt them. (That’s excluding periods when they hiked the consumption tax). So I also question whether they will ever take any further measures to loosen policy.

The NAB business sentiment indices are coming out in Australia. There aren’t any forecast for them, so you just have to watch the numbers, if you’re trading AUD. Business conditions are headed down but business confidence is headed up, for some strange reason. As you can see, AUD tends to track – or is it lead – the business conditions, so it’s worth watching it to get an idea of what might happen. In particular, if confidence does start to rise, then the Reserve Bank of Australia may become more optimistic about the labor market, which they’ve said is what’s going to determine the pace of rate cuts. Better business confidence usually means more hiring, so not as much need to cut rates.

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Marshall Gittler

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