Good morning,
Split Fed, lower dollar
European traders and investors are walking to their desks this morning and seeing the dollar once again on the back foot. The minutes from the July Fed meeting published overnight are the main culprits with some market participants taking the split within the Fed as additional belief that interest rates in the US are not going anywhere anytime soon.
While some members, given the strength of the US jobs market wanted a rate hike others who are less convinced about the Federal Reserve’s ability to create inflation in the US economy were more than happy to hold off. These minutes are slightly stale by now given the strong US jobs numbers and weak first reading of US GDP for the 2nd quarter and more recent comments from FOMC members have been increasingly focused on something happening by the end of the year.
We still think rates come higher in December
Predictive markets still have the probability of a hike by December at around 49% and given the Fed’s aversion for rocking the boat, unless we see a significant pick up in the data, we think it unlikely that rates are hiked before then. In June, the consensus within the rates setting committee was for a hike by the end of the year and there is nothing within these minutes to show that the overall forecast has changed materially since then.
The dollar may continue to be oversold for a while and we must look forward to next week’s Jackson Hole Economic Symposium and Janet Yellen’s speech will have to reinvigorate market expectations of a move in 2016 for the greenback to recover.
UK jobs market showing some resilience
The largest surprise yesterday was the latest run of UK jobs data including the first look at jobless claims since Brexit. Most spectators disregarded the unemployment rate and earning numbers given they were for June and not July, but a 8,600 person decline in those claiming unemployment insurance was a strong turn-up for the books. This number can and commonly is revised so we caution reading too much into the figure and our core view remains that unemployment increases and wage growth slows as the true extent of the Brexit slowdown begins to impact the UK corporate sector.
Sterling rallied slightly on the number and could easily continue today should the latest run of retail sales numbers surprise to the high side. June’s figures were poor and so a rebound is likely but given the dependence the UK economy has on personal consumption this is the most important present indicator; have UK consumers turned off the taps? If they have then for how long? And if they haven’t are they financing it via increased borrowing or lower savings given the lack of wage increases?
The answer should be made clear at 09.30 but this is economic data so will likely be as clear as mud.
AUD unemployment not showing healthy fundamentals
AUD is back in the news overnight following a jobs report that increased part time employment at the expense of full time work. 71,600 part time roles were filled in July whilst 45,400 full time jobs were lost in the same month. Despite the latest comments from the Reserve Bank of Australia, we are lead to believe that additional rate cuts are likely by the end of the year. While interest rates are at a record lows, we have to think that despite the lack of easing bias the reluctance of the major 4 banks to pass on the rate cut and continuing weak inflation will push the RBA into additional action.
But a cut to record lows still has done little to tarnish AUD strength. Australian 10yr debt still pays 1.88% compared to 1.04% in Canada, 1.561% in the US and 0.544% in the UK and political risk is low compared to most, and therefore we can still see buying support remaining for the currency.
Have a great day.