Market Overview

Were non-farm payroll employment disappointing? As we mentioned before, following the robust US data released last Wednesday and the hawkish tone of the FOMC statement, strong employment data was the missing link for Fed to meet its dual objectives and put upward pressure on the FOMC’s forecast rate hike-path. But Friday’s weak figures show that there is still slack in the labor market, and this gives the Fed some space to keep interest rates low for longer. Fed fund futures rate expectations for two years from now finished the day 10 bps lower. the dollar generally declined. The non-farm payrolls gained 209k in July after surging by 298k in June. The figure was below the forecasts for payrolls to rise by 231k, disappointing the market, while the unemployment rate rose to 6.2% from 6.1%. Average hourly earnings were flat on a mom basis, leaving the annual rate of increase at +2.0% yoy, missing estimates of an increase by 2.2% yoy Our view is that in fact the figures were better than the market perceives and we think the dollar should recover. First, the 209k figure isn’t that bad; it only looks bad in comparison with 298. The average for the two months combined is 253k, which is very high. It’s been over 200k for six months in a row, the first time since 1997 that that's happened. Job gains were broad-based across many industries. Secondly, the small rise in the unemployment rate must be seen against the background of a rise in the participation rate, which may indicate that people are becoming more optimistic about their chances of getting a job. On the other hand, the earnings figures were definitely disappointing, especially coming after Thursday’s announcement of a sharp rise in the Employment Cost Index. In any event, I think the market is likely to reassess the numbers and the dollar should resume its rally this week. Today: On Monday, we have a very light calendar compared to the rest of the week. During the European day the only noteworthy economic indicator we get is the Eurozone’s PPI for June. The forecast is for the pace to remain unchanged at -1.0% yoy, adding to worries about low inflationary pressures in the bloc. From the UK, construction PMI for July is coming out and the forecast is for the figure to decrease slightly, adding sense to the cool down in the housing market caused somewhat by the new mortgage rules introduced by the BoE. We have no major data or events coming from the US and we have no speakers on Monday’s schedule. Rest of the week: As for the rest of the week, we have many Central Banks holding their meetings. On Tuesday, the Reserve Bank of Australia meets to decide on its interest rates. The RBA is unanimously expected to keep rates steady, though the RBA’s quarterly Statement on Monetary Policy, to be released on Friday, should give us more insights about the Bank’s stance. On Thursday we have the Bank of England and the ECB holding their policy meetings. Once again, BOE is unlikely to change policy and the impact on the market, as usual, should be minimal. The minutes of the meeting however should make interesting reading when they are released on 20th of August, especially after the recent poor data added concerns over the UK’s economy recovery. Some analysts expect to see the first MPC member to dissent in this cycle and vote for a rate hike. In the Eurozone, in spite of signs that the recovery is weakening further, we don’t expect any policy changes at their meeting since the ECB’s June’s measures are yet to be implemented. As for indicators, on Tuesday we get the service-sector PMIs for July from the countries we got the manufacturing data for on last Friday. Eurozone’s retail sales for June are also coming out. On Wednesday, New Zealand’s unemployment rate for Q2 is anticipated to decline, while the nation’s participation rate is expected to remain unchanged. Germany’s factory orders for June are forecast to turnaround on a mom basis, whereas the yoy rate is expected to slow down adding concerns over the bloc’s strongest economy recovery. From the UK, we get industrial production for June and from the US, trade balance for the same month. On Thursday, Australia’s unemployment rate for July is coming out and German industrial production for June. Finally on Friday, from Japan and Germany, we get current accounts for June and from China trade balance for July. Canada’s unemployment rate for July is also coming out.