It’s been almost a week since Jay Powell’s comments at Jackson Hole, and it’s been one-way traffic ever since, although last night’s close in the US did see a rebound off the lows of the day, with the Dow Jones and S&P 500 both managing to eke out a modest gain. This late rebound should translate into a positive European open.
Not only did we hear the Federal Reserve chair offer the unequivocal message that the US central bank would continue to hike rates until the job is done, but every Fed official since then has offered the same message, along with the postscript that rates were unlikely to come down any time soon, and certainly not before 2024. This week’s economic data out of the US has merely served to bolster the message in respect of the Fed’s determination to raise rates and mitigate any concern their actions might have on the US economy.
Yesterday, weekly jobless claims fell back to 232,000, while the August manufacturing ISM survey saw a positive headline number, as well as softer inflation, and stronger employment components. Even the ADP report, which saw a disappointing headline number of 128,000, showed that wages were rising strongly, at a rate of 7.6% for existing positions, indicating that inflation was becoming more embedded in the wider economy. While stock and bond markets have struggled over the past week, the US dollar has surged, hitting 24-year highs against the Japanese yen, and a 20-year high against a basket of currencies.
This week’s US economic data has been a stark contrast to the economic numbers coming out of China, Europe and the UK, which to all intents and purposes have been dire, and with little prospect that we are likely to see a tangible improvement, against a backdrop of tighter monetary policy from the ECB and the Bank of England.
The Chinese economy also looks set for a long hard winter, albeit for reasons to do with covid restrictions, after yesterday’s decision to lock down 21m people in Chengdu, while in Europe the prospect of energy supply disruptions is likely to act as a noose around the neck of any prospect of an economic rebound in the weeks and months ahead.
We’ve already seen this week Italian PPI hit a record high of 45.9% in July, with a one month gain of 6.5%, a surge that is likely to be reflected in today’s EU PPI release, which is expected to jump from 35.8% in June to 37.3%. Against this backdrop of economic weakness and the determination of central banks to prioritise inflation over growth, it’s a tough backdrop for stock markets.
Today’s US non-farm payrolls report has the potential to add another layer to the US dollar strength narrative, as well as equity market weakness, in the event we get another strong number this afternoon. The resilience of the US labour market has been a notable standout when it comes to US economic data this year. The last three payrolls’ reports have seen the headline numbers beat expectations. Wage growth has also proved to be resilient, even as vacancy rates are still close to record levels.
The July payrolls report was doubly impressive given that consensus expectations were for the lowest number this year, and what we got was over double forecasts, at 528,000. Wage growth has also remained solid rising to 5.2%, while the unemployment rate fell to 3.5%. These are expected to remain unchanged. Another positive payroll number today would in all probability rubber stamp the possibility of a 75bps rate hike when the Fed next meets later this month.
Expectations are for 298,000 jobs to be added, however given how much forecasts missed in July, one has to question how reliable these estimates are likely to be. The only piece of the puzzle that’s been missing from the payrolls reports this year has been the low level of labour participation, which hit its lowest level this year in July at 62.1%. We’ve so far seen little evidence that the rising cost of living in the US has prompted a return to work from those early pandemic retirees, like we’ve started to see here in the UK. Could that be about to change as we head towards the autumn and the weather gets colder and the cost of living starts to bite a little harder?
EUR/USD – the 0.9900 area continues to contain the downside, however in the absence of a move through last week’s peaks at the 1.0120 area, the risk remains for a break below 0.9900 and move towards 0.9620.
GBP/USD – yesterday saw us slip to a low of 1.1499, before rebounding with the March 2020 lows at the 1.1410/15 area the next key support. For the moment there has been little evidence of a rebound, with resistance at the 1.1750/60 area.
EUR/GBP – pulled back from the 0.8670 area, with more solid resistance at the June highs at 0.8720. Support remains back at the 0.8580 area.
USD/JPY – has broken through the previous highs at 139.40, and also through the 140.00 area. This now opens up the potential for a move towards 145.00, and the 1998 highs at 147.70. Support now comes in at the 138.00 area, and Tuesday lows.
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