Employment Data Ahead
Employment Data Ahead
The dollar had a mixed week last week despite investors finally waking up to the fact that the Federal Reserve has much more work to do before inflation is conquered. Bond yields in the US are also realising that rates will stay higher for longer and have been starting to rise again, especially in the 10-year, before giving back some of their gains on Friday. The rise in 10-year yield above 4% was sparked by the surprising jump in the unit cost of labour released on Thursday. Naturally, as yields rise in the US, the dollar tends to appreciate as investors chase the perceived safe haven of yield over riskier asset classes. Sterling is, as we have said previously, vulnerable, especially after the governor of the Bank of England prevaricated over policy as he did on Wednesday.
Some observers thought that the Windsor Agreement would shore up the pound as it, at first glance, seemed to smooth out most of the friction points between the UK and the EU. On closer inspection, it now appears that a significant element of smoke and mirrors is covering the standard EU fudge. Politics is often about the optics of an agreement, and Rishi Sunak has tried very hard to sell the agreement to all and sundry. But as it is studied in more depth, it is not necessarily beneficial for Great Britain, and this may present the Prime Minister with more questions than answers. With Boris Johnson finding his voice from the back benches, possibly emboldened by the surprising appointment of his party gate “judge” Sue Gray to be Keir Starmer’s chief of staff, political tail risk may start to be felt in sterling. The euro, meanwhile, has benefitted from the ECB pretty much committing to raising rates by 50bp in March and possibly in May. With core inflationary pressures still growing, as shown by last week’s CPI data, a terminal rate of 4% is now firmly on the table. Whether the zone’s industries can handle rates as high as forecasted, we will leave for another day.
The coming week sees two key events in the US, which will help set the tenor and tone of the markets. First up, we have Jerome Powell presenting the bank’s Semi-Annual Monetary Policy Report to congress tomorrow and Wednesday. Investors will be listening to hear if his testimony provides a clue to how aggressive he feels that the Fed needs to be. As far as the dollar goes, the other key event is the release on Friday of Non-Farm Payrolls, the bell-weather US employment data. Traders will be watching these numbers closely to see if last month’s strong report was indeed weather affected. Because of the previous month’s cracking number, a modicum of caution is merited ahead of Friday’s number with a huge range of guesstimates to the number. Did last Friday’s ISM good employment data give a hint? Well, we will have to wait and see. As usual, in the run-up to the number ADP will release its take on white-collar employment on Wednesday, and we will also get the weekly jobless report on Thursday as well. Fed board member Christopher J Waller summed the situation up perfectly last Thursday when he said, “if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released”.
As we said earlier, the euro is being supported by the hawkish rhetoric from ECB members and the ruling council’s determination to raise rates. The publication of the ECB’s minutes last Thursday underscored their fear that wage growth and core inflation are a problem and, as they said, “it’s too early to declare victory over “. After Friday’s Services, PMI showed continued strength and some of the regional numbers, such as Spain’s, were exceedingly strong. It would be a surprise if the ECB’s resolve weakened but this week’s data on Retail Sales, Employment and GDP may alter this view . Luis De Guindos, in a speech on Friday, said that any interest rate decisions are data dependent , and we expect more such comments ahead of the next ECB meeting, now less than two weeks away. With data still staying strong the euro should keep trading in a relatively tight range against the greenback whilst pushing ahead against sterling.
The poor old pound…what can I say? Well, as elsewhere, Friday’s PMIs were somewhat better than expected, still above 50, which lends strength to the belief that the economy is still holding up well. Whether this is true or not, time will tell, but what is sure is that inflation is still rampant in the shops, as last week’s 17.1% Kantar food inflation report confirmed. As we said earlier, the Bank of England is still prevaricating on what to do next, but currency markets are not famed for their patience and sterling could see further pressure this week and test the lower end of its recent range at 1.1850. Data may well take second place to politics and events elsewhere, but nonetheless, the release of Industrial and Manufacturing Production on Friday, along with January’s GDP, may supply a wake-up call. Similar in a way to the distortions to American numbers caused by the weather the UK’s GDP is hard to call after the disruptions caused by the World Cup and the Queen’s funeral. The consensus view however appears to be that we will witness a first quarter decline as the UK teeters on the edge of recession.So plenty to look forward to with the Bank of Canada ( Wednesday) and Bank of Japan( Friday) meetings adding to the spice as will the oft overlooked Chinese CPI on Thursday.