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 Friday 05 August 2016

PM Bulletin: Non-Farm Payrolls soar

 

 

We may be in the peak holiday month of August but markets are anything but dull. Today saw the release of US Non-Farm Payrolls for July. The consensus expectation was for an increase of around 180,000 which would have been in line with the six month average of 182,000. Instead the Bureau of Labor Statistics reported a rise in payrolls of 255,000 and revised up June’s figure by 5,000.

This means that we’ve now had three consecutive months when the actual number has missed the forecast by a significant percentage. Today’s number was 41% above forecast; last month’s was 64% above while May’s was 76% below. The market reaction to today’s better-than-expected data was swift and sharp. The dollar and US stock index futures flew higher while precious metals dumped. The sell-off in gold and silver was, to me, a stark illustration of how US-centric financial markets are. Yesterday’s additional monetary stimulus  from the Bank of England saw gold and silver rally as looser financial conditions increase the attractiveness of the two precious metals.  Currently, every major central bank is actively moving to loosen monetary policy with one notable exception. The US Federal Reserve ended their monthly bond purchase programme towards the end of 2014 and then raised rates by 0.25% in December last year. Two observations: firstly, the Fed still has no intention of reducing the size of its balance sheet. It may have stopped buying bonds outright, but it replaces any maturing debt instruments with new purchases. Secondly, since it raised rates back in December its headline Fed Funds rate fluctuates within a band between 0.25 and 0.50%. This is not what investors could possibly consider restrictive.

The Fed is desperate to talk up the outlook for the US economy. Today’s payroll number plays into this and traders have responded by hoovering up risk assets and dumping safe haven plays like gold and silver. Yet despite the better data, the Fed’s FOMC cannot bring itself to raise rates again as it is terrified of triggering another stock market meltdown like the one we had in January. It certainly wouldn’t want to risk such an upset so close to the US Presidential Election. This is precisely what the market is saying as the fed fund futures assign just an 18% probability of a hike this September. Seen this way the rally in equities makes perfect sense: the data shows improvement in the US economy, but the Fed’s hands are tied when it comes to raising rates – a perfect Goldilocks environment.

But there is a problem here. The dollar is also pushing up as investors rush into US assets. This hurts dollar-denominated commodities, including oil, which increases the risk of corporate bond defaults. It also means that China’s yuan (which is pegged to the dollar) is heading higher. This makes China less competitive and the risk is that policymakers there decide to devalue the yuan, which is deflationary for everyone else. China devalued this time last year and again in January with disastrous results. Investors should be hoping that the greenback loses its mojo – and soon.

David: But there is a problem here. The dollar is also pushing up as investors rush into US assets.   

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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