A mixed start to the European session on Monday is offering little direction for the U.S. ahead of the first trading session of the week.
U.S. futures are poised to open higher, reversing losses made on Friday as traders eye speeches from Federal Reserve members Stanley Fisher and Dennis Lockhart, both of whom are voting members of the FOMC. The U.S. jobs report on Friday didn’t blow anyone away but it was sufficiently strong to continue to justify a rate hike from the Fed next month. Unemployment at 5.3% is within the range that the Fed deems to be full employment while job creation of 215,000 in July remains strong.
Wages remain the potential stumbling block for the Fed. While wage growth is being seen, it remains fairly subdued by U.S. standards and the stronger dollar won’t be helping this. It seems that U.S. companies are suppressing wage growth potentially in an attempt to offset a loss of competitiveness as a result of the stronger dollar. This attempt to remain price competitive is likely to weigh on inflation for some time yet which may influence the Fed’s decision in September.
It will be interesting to see how Fisher and Lockhart view the jobs report today and whether the lack of wage growth could stand in the way of a September rate hike. There remains a lot of disagreement between market participants at the moment on whether a rate hike should come and whether it will. There is a lot of emphasis being placed on current levels of inflation and not enough on what the future path could be if rates are not hiked sooner rather than later which is the message that the Fed has tried to deliver for months.
If the Fed is not convinced by the inflation figures, we could still see a rate hike this year but maybe a smaller one than expected, say 10 basis points. This would send the message that the path of rates is higher and the return to normalization has begun, while not threatening the recovery or putting too much of a burden on U.S. companies from the impact it would have on the dollar.
Also of note this week will be U.S. retail sales on Thursday, with the overall and core readings both seen rising by 0.5% compared to June. Consumer spending has been surprisingly weak this year given the moderate wage growth and boost to disposable income from lower energy prices. This has been a concern to many who fear it may reflect low wage expectations, an increased desire to save or even worse, low inflation expectations. That said, there is no evidence of the latter and if there was, I very much doubt that the Fed would consider a hike. Whatever the reason, the Fed must be getting concerned at this stage and a boost in spending ahead of the September meeting would surely boost the chances of a hike.