6 May 2016
US: NFP in focus for USD & rates direction - MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that their sense is there is a degree of added importance in today’s nonfarm payrolls report with rhetoric from Fed officials all suggesting the door remains open to a Fed rate increase at the June meeting.
Key Quotes
“The rates market remains convinced that there will be no rate increase at that meeting and we have come around to this view as well. But two strong jobs report with evidence of increased wage inflation would certainly result in the decision being a lot more finely balanced and would inevitably result in the rates market shifting more toward a move and a strengthening of the dollar.
St. Louis Fed President Bullard described June as a “live meeting” while Dallas Fed President Kaplan stated he merely wants to see a continuation of progress toward full employment and price stability. The general flow of data this month will also be crucial in giving Fed officials confidence that the Q1 GDP slowdown was not an accurate reflection of the US economy. Corporate profits have dropped on an annual basis for two consecutive quarters and hence the Fed needs clarification on a growth pick-up before moving again.
The advance of the dollar this week is no doubt in part a reflection that the dollar had become excessively cheap relative to yield spreads between the US and other key major economies. Our DXY-weighted 2-year yield spread points to the DXY having over-extended to the downside while the EUR/USD 2-year swap spread continues to signal EUR/USD between a 1.0500-1.1000 range.
The crucial link to the Fed’s dual mandate is of course wage growth. The FT today reports in an article the building evidence of accelerating wage growth in the US – something we have been highlighting over the past six months. Data from the National Center for the Middle Market survey of mid-sized companies revealed that over half of respondents were considering a pay increase – a notable jump from the previous report. Data from the NFIB also shows that compensation plans by small businesses are back at levels that prevailed before the financial crisis.
We have highlighted here before the fact that with the unemployment rate below the OECD NAIRU estimate, wages have begun to strengthen exactly as happened in previous economic cycles. Average hourly earnings are expected to accelerate in the data released today from 2.3% Y/Y to 2.4%. The advance of the dollar ahead of today’s NFP report suggests the market sees greater risk of another decent jobs report. Despite the surprise slowdown in ADP employment growth reported on Wednesday, our own NFP model is estimating a 223k gain. We would expect the dollar to advance further on the back of that scale of NFP increase.”
Key Quotes
“The rates market remains convinced that there will be no rate increase at that meeting and we have come around to this view as well. But two strong jobs report with evidence of increased wage inflation would certainly result in the decision being a lot more finely balanced and would inevitably result in the rates market shifting more toward a move and a strengthening of the dollar.
St. Louis Fed President Bullard described June as a “live meeting” while Dallas Fed President Kaplan stated he merely wants to see a continuation of progress toward full employment and price stability. The general flow of data this month will also be crucial in giving Fed officials confidence that the Q1 GDP slowdown was not an accurate reflection of the US economy. Corporate profits have dropped on an annual basis for two consecutive quarters and hence the Fed needs clarification on a growth pick-up before moving again.
The advance of the dollar this week is no doubt in part a reflection that the dollar had become excessively cheap relative to yield spreads between the US and other key major economies. Our DXY-weighted 2-year yield spread points to the DXY having over-extended to the downside while the EUR/USD 2-year swap spread continues to signal EUR/USD between a 1.0500-1.1000 range.
The crucial link to the Fed’s dual mandate is of course wage growth. The FT today reports in an article the building evidence of accelerating wage growth in the US – something we have been highlighting over the past six months. Data from the National Center for the Middle Market survey of mid-sized companies revealed that over half of respondents were considering a pay increase – a notable jump from the previous report. Data from the NFIB also shows that compensation plans by small businesses are back at levels that prevailed before the financial crisis.
We have highlighted here before the fact that with the unemployment rate below the OECD NAIRU estimate, wages have begun to strengthen exactly as happened in previous economic cycles. Average hourly earnings are expected to accelerate in the data released today from 2.3% Y/Y to 2.4%. The advance of the dollar ahead of today’s NFP report suggests the market sees greater risk of another decent jobs report. Despite the surprise slowdown in ADP employment growth reported on Wednesday, our own NFP model is estimating a 223k gain. We would expect the dollar to advance further on the back of that scale of NFP increase.”