Market lulls are increasingly common events it seems, with the days that promote some form of genuine volatility all too few at the moment. Yesterday continued the recent spate of trending markets, with the price action mirroring what we expect throughout the summer; a dollar strengthening against its crosses. Some would label my focus on wages as myopic; that of all the indicators, signals and data points released on a monthly basis, it should be wages where my concentration lands. Yesterday and today will help prove why I feel that way.
The NFIB survey of small businesses is not something we tended to talk about in the depths of the global financial crisis or the recession; the news could be counted on to be negative and the focus of policy makers, both fiscal and monetary, was on more structural and theoretical questions of global economics. The bleeding had to be stopped. With a recovery in the US picking up pace and a new Fed Chair who seems to be more supportive of ‘small town America’, wage movements are now more important to the interest rate and inflation debates.
Yesterday’s survey showed that small businesses in the US are starting to see the labor market tighten. The survey’s expected employment sub-index rose to 10 from 8 which seems consistent with increasing payrolls on a monthly basis by around 225,000. Combined with reports of businesses finding it difficult to fill positions, we have a surefire sign of impending wage inflation as job applicants become more confident in bidding up wage settlements and employers more likely to do so to acquire the right talent. This leads to a growth in aggregate demand, output and eventually inflation which will promote a central bank desire for tighter monetary policy.
Wage data in last week’s payroll report was nothing to get wildly excited over but a continuation is key to the ongoing US and dollar recovery. The Federal Reserve has said as such with their continual chatter around the level of ‘slack’ in the US economy and the need for this to be taken up before rate rises are possible in the United States. The story in the UK – and the language used by the central bank – is very similar.
Carney was drafted into the position as Bank of England Governor to guide the UK economy through the recovery and has found that all that was needed for the UK economy’s resurgence was to do nothing. The Bank’s initial forward guidance target of 7% unemployment has been reached with time to spare but now is not the time to be raising rates in the eyes of the MPC. Once again, the spotlight must fall on wages.
Movements in recent months have been towards some form of parity between inflation and wages, but unfortunately this month that is expected to fail. Average earnings are expected to only rise 1.2%, down from last month’s 1.7% and below CPI at 1.8% – any further disappointment and we will be looking for a lower sterling today but we believe that this dynamic will keep rate rise expectations depressed through the rest of the year.
The overall jobs market report is due at 09.30.
Yesterday’s data calendar was basically done by mid-morning following the publication of industrial and manufacturing production numbers from Italy and the UK. Both exceeded expectations with production rising by 1.6% on the year in Italy and 3.0% in the UK. Certainly in terms of the UK, it confirms that the recovery is becoming increasingly broad based and that the pace of growth overall in Q2 could easily be over the 1% mark.
Away from sterling news, we expect the general trend of listless trending with overall euro weakness to continue through the session. Today's highlight will be the latest meeting of the Reserve Bank of New Zealand which is expected to raise rates once again by 25bps. Communications from the central bank in the past few months have warned of an overvaulation of the NZD and there is a real chance that tonight’s decision to hike comes alongside language that hints at a pause in the tightening cycle – a kiwi negative. The announcement is due at 10pm.
