Employment Data Nonsense
During the week, I participated in another episode of Trading Blows with Michael Brown( Pepperstone) and Ioan Smith ( Moved Average), in which we discussed the US economy and, in particular, the relevance of Non-Farm Payrolls to it and the dollar. The three of us agreed that the actual number might as well come from a random number generator or a mathematician with Tourette’s. Not only the number but also the estimates, which have now been beaten for the last 14 months, including last Friday’s numbers. To us three podcasters, the number bears little relevance to the post-Covid economy. The methodology to collate the NFP data is flawed, and the outcome is arguably no longer valid; with more people sharing jobs, the gig economy and hybrid working, how can a method first used in 1968 still be valid? Of course, when the number was released, beating expectations by a large margin, the dollar immediately caught a bid as traders leaned more towards a rate hike by the Fed later this month. NFP also reported that unemployment had popped up unexpectedly whilst participation held steady, which seems odd when the JOLTS figure earlier in the week showed job vacancies rising to 10.1mln in April.
Last week’s other reports were negative in the US, and it looks like the economy in the US is turning down pretty quickly. The clearest indicator of this is that money supply is shrinking rapidly, as it is in the UK and Europe. Usually, this would herald inflation dropping quickly, which it is undoubtedly showing signs of doing in the US and Eurozone but beware of premature celebrations. The core levels of inflation are holding up on the continent, and although the enthusiasm for a rate hike has cooled over the channel, that’s not to say that they have disappeared for good. Frankfurt’s diminishing enthusiasm for a rate hike eased the euro last week, especially against sterling, where it touched its lowest level for six months. Sterling also had a good run, gaining 1.8% over the previous seven days on the greenback. However, much of the pound’s strength is predicated on the Bank of England acting responsibly and aggressively moving Base Rate up. I won’t be holding my breath that the Monetary Policy Committee, apart from Catherine Mann, have the combined intelligence to do so.
Whilst unemployment stays where it is, albeit increasing slightly, there is no way Jerome Powell will even be contemplating cutting rates. With the Fed undecided on whether to skip, pause or hike, next week’s CPI will be the final piece in the data jigsaw. The currency markets are also uncertain about the Fed’s next move, although there is undoubtedly some wishful thinking in the equity markets that interest rates may have peaked. With the passing of a new debt ceiling limit, the Treasury General Account in the US needs to be topped up by anything between $750bln and $1Tln. With this amount of bills and bonds being issued, there should be some forthcoming support for the greenback, as it would be a surprise if yields didn’t rise to attract buyers. With no first-tier data, the market may latch onto the Purchasing Managers’ Reports. These reports published by S&P are released throughout today, with the US numbers this afternoon. The UK releases are shortly after this report hits your desk this morning and will continue tomorrow. As with the employment data and with inflation data due next week, they are really little more than a distraction, but nonetheless will be watched for signs of a contraction.
If you would like to listen to the podcast mentioned above, please follow this link https://open.spotify.com/episode/6CJD43LhQDzhVhoPQLcV2M
Have a brilliant week!