US: Jobs growth will support USD in quiet holiday trading - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that very often the US nonfarm payrolls report can dictate the tone of market trading for much of the month and with the summer holiday season now fully upon us that may well be the case again over the coming weeks.

Key Quotes

“The DXY Index on Friday reached an intra-day high of 96.52, very close to the high on Friday 29th July when a weak GDP report sent the dollar lower. So that weakness of the dollar due to concerns over the economic outlook has been close to fully reversed with the prospect of a second rate increase from the Fed in December still considered alive.

The data was certainly promising with most aspects pointing to continued labour market strength. There were 420k new jobs created in the household survey and only a 407k gain in the labour market stopped the unemployment rate from drifting lower. With 821k new entrants to the jobs market in the last two months, confidence seems high over job prospects. In addition, weekly hours worked increased to 34.5 after being at 34.4 for five consecutive months and back to the level that was the norm in both 2014 and 2015.

Wage growth also strengthened, increasing the prospect of annual wage growth being close to 3.0% by the end of this year.The rates market certainly responded and the 2-year UST bond yield at 0.72% is above the level trading prior to the weak real GDP report at the end of July. We wouldn’t expect much follow-through on the rates side however given this report in our view does not raise the prospect of bringing forward the timing of the next rate increase from the most probable timing of December.

A reminder of the caution of the FOMC has come in the form of an FT interview with Governor Powell who expressed concern over the prospect of a stagnation trap for the US economy. He admitted that he was more worried today over the idea of secular stagnation and suggested the long-term equilibrium level for the federal funds rate could be below the current Fed estimate of 3.00%. Even if there is another strong jobs report in September, he wouldn’t be “pounding the table” in arguing for a rate increase at the September meeting – it would merely be a conversation.

The rates move post the NFP report may well help stabilise the dollar and reduces the risk of a continued dollar slide fuelled by low volatility and investors moving further into carry trades in anticipation of a quiet August trading period. There is no real top-tier US data until Friday when we get the release of July retail sales data – so in that context, Friday’s jobs report should help keep the dollar underpinned for now. Another improvement in the Labor Market Conditions Index this afternoon would certainly help to reinforce the positive sentiment from Friday’s NFP report.”