The US Dollar is finally creaking into life again with equity markets lower and developed nations bond yields higher as the market gets behind the belief that the Fed will soon have to respond to what is a very good run of Q2 data.
Let’s not forget that the Fed’s decision to acknowledge the strength cast by Wednesday’s GDP number, the employment cost index and a predicted strong pull higher in today’s non-farm payrolls announcement may only amount to a nod of the head. The make-up of this Federal Reserve Board is one of cautious doves with a couple of hawks thrown in for good measure; a shift of that balance is the catalyst for that strong dollar dynamic.
Following the good growth announcement on Wednesday the focus has pulled back on to wages in the US economy. There is little chance in our eyes that the overall payrolls announcement trumps last month’s 288k number as we believe that a significant portion of the rebalancing from Q1′s fall off was taken up in that number. That being said, indicators remain pointed to a strong growth in overall employment and we are looking for a figure of 245k, just north of the consensus of 233k.
As we said, it is wages that the market will react on through the rest of the afternoon session after the initial headline release. An employment cost index run of 0.7% is a strong number and we would hope to see that wages in the US are around 2.2% higher on the year. Even if the headline number misses estimates, a strong wage number will see USD continue its run. A rising tide lifts all boats.
The European single currency is still collecting records like they are going out of fashion and yesterday’s preliminary inflation number of 0.4% hit hard thoughts of a quick positive reaction to the European Central Bank’s latest round of loose monetary policy. This new cyclical low shows that the ECB will have to make another amendment to its monetary policy through Q4 we believe and that the path of the euro as a currency remains lower as a result.
Today’s run of PMI data may afford some protection for the single currency; this month’s preliminary set was very strong but we look for a weaker German number as the fallout from the MH17 plane incident is factored into industrial confidence. The various price indices will be able to show us whether input prices of raw materials are falling and whether manufacturers, particularly in the periphery, are having to cut margins further to respond to low consumer demand. Italy’s is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 – all times BST.
The UK number is due at 09.30 and is expected to remain in the mid-to-high 50.0s – strong but not exceptional. Those who are looking for interest rate increases in the UK before year end will be looking for an increase in manufacturing employment and subsequent wage increases in specialised areas. A pick-up in input and output prices would not go amiss either.
China’s announcement overnight has not managed to stop falls in Asian markets despite being at a 2yr high; the “mini-stimulus” that is working through the economy continues to impact positively it seems.
