Fed primed for a rate cut
June 10th: Highlights
- NFP disappoints bulls
- Hunt for a new UK Prime Minister begins in earnest
- Eurozone economy remains in the doldrums
Employment report “seals the deal” for a rate cut
The recent economic slowdown which has led the Federal Reserve to consider cutting short-term interest rates was further evidenced by a fall in the increase in hourly earnings from 3.2% to 3.1% in May.
While the headline NFP data is very much the attention grabber, it is earnings that give a more balanced barometer of the employment market as a genuine indicator of the tightness (or otherwise) of the jobs market.
The “base number” of new jobs created is +100k new jobs in order to keep up with growth in the working age population. The dramatic fall in new jobs from April to May may be corrected a little in next month’s report but when coupled with lacklustre manufacturing output, consumer spending and new home sales, the economy is clearly weakening. It is still unclear whether this is a “rough patch”, or the start of a longer-term trend.
Judging by the reaction of the dollar index, the financial markets believe it is the latter. The index fell to its lowest level in two months, reaching 96.46 before closing at 96.59. It has opened a little higher this morning in Asia. This week’s release of inflation, industrial production and producer price data is likely to see the dollar remain in the market’s spotlight.
UK PM hopefuls “under starters orders”
Two of the front runners; Boris Johnson and Michael Gove saw their fortunes vary wildly over the weekend. Johnson received the backing of the European Research Group, the influential pro-Brexit group of MPs headed by arch-Brexiteer Jacob Rees-Mogg. Gove, on the other hand, was forced to admit his use of a “class A” drug twenty years ago and that he was lucky to have escaped prison.
It is hard to see how Gove can have any future now in the contest. However, so far, he continues to “tough it out”.
With the nominations today and the first vote on Thursday, the fascination with politics is going to continue to drive the financial markets this week, despite a slew of economic data.
The most important data releases are industrial and manufacturing production later this morning and employment tomorrow.
Industrial production is expected to have fallen from 0.7% in March to 0.1% in April. There is a real possibility that it could have contracted. Manufacturing is also expected to fall from 0.9% to 0.2%.
Headline employment remains an advertisement for the Governments jobs initiatives, so it is taken with something of a “pinch of salt”. However, in a similar manner to the U.S., it is average earnings that provide the real detail, and these appear to be topping out at 3.3%.
Given the fall in the dollar on Friday, the rise in the pound from an open of 1.2700 to a high of 1.2763 means very little. However, versus the single currency, the pound continued its recent fall, reaching a low of 1.1233 and closing at 1.1238.
Euro continues to “scrape along the bottom”
The euro finished last week on the back of two very strong days although strength for the single currency is not, as I have said before, necessarily in the best interests of the Eurozone economy. Inflation remains worryingly low, but the ability of exporters to sell outside the region becomes limited.
German industrial production and export data were released on Friday and both were extremely weak. Industrial production contracted by a seasonally adjusted 1.9% in April following a rise of 0.5% in March and exports, despite the weakness of the euro, fell by 3.7% over the same period following an increase of 1.6% previously.
While it is a holiday in most of the major European markets today, the Sentix investor sentiment report will be released. This is a major survey of more than 1600 contributors using 36 different indicators. It is expected that sentiment is likely to have fallen from 5.3 in May to 1.4 in June
While it is doubtful that this will have a significant bearing on the single currency it is another nail in the coffin of any recovery in the short term.
The euro had its highest weekly close in ten weeks on Friday, reaching a high of 1.1348 and closing at 1.1334.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”