Good morning,
US labour market could have reached peak
Truth be told, Friday’s US jobs numbers looked a mess – just 98,000 jobs added (almost half the consensus estimate) marking the second worst nonfarm payrolls reading since the Global Financial Crisis. Despite this, the unemployment rate fell – again – to fresh post-crisis lows of just 4.5%. These should be perfect conditions to foster a more rapid change in wage gains, but this wasn’t the case. Wage gains moderated down to 2.7% meaning any and all increases in pay are being wiped out by an inflation rate that’s approaching 3.0%.
Trump’s jobs promise looks even tougher
So what is happening? In what sounds like a bit of a cop-out, the moderation in jobs growth is being put down to one-off factors like weather in the north-east and slower-than-expected demand for retail goods. It’s likely these factors did play a part, but what’s more likely is that the US economy is incredibly close to full employment – meaning the economy’s reached a level at which all resources (be it labour, capital or land) are being used in the most efficient way possible. The Federal Reserve themselves already see the most recent unemployment rate as well below their estimated natural rate of unemployment (4.7%), suggesting that significant further job gains in the US will be few and far between. Trump’s promise of 2.5 million more jobs for US workers is not off to a good start.
What did this mean for the currency markets? The dollar initially sold off on the poorer than expected headline but selling into an already weak market is a tough task, and the USD index managed to end the day stronger.
Poor UK production calls time on strong growth
The US jobs report wasn’t the only mixed data release on Friday; UK industrial and manufacturing production disappointed estimates and contracted in March – signalling a weak end to Q1 and falling in line with our estimates of a poorer start to 2017. Markets were happy to sell the pound throughout the day and GBP/USD remains below 1.24 as we head through the European open. A busy week for UK data will keep rates volatile: inflation numbers tomorrow are expected to hold at 2.3% (still outstripping wage gains), but the unemployment rate is seen holding steady at 4.7%.
100 days to sort out trade
President Trump’s meeting with his Chinese counterpart Xi Jinping concluded over the weekend, and the leaders both made commitments to work on a three-month plan to identify and redress the international trade imbalance that exists between the two countries. This could involve opening up the Chinese market further for US services firms and could potentially see tax rebates for Chinese exporters cut to improve international competition.
Whether this was a firm commitment or just pandering to the press remains to be seen, but the meeting appears to have concluded on a far more positive note than many had feared. Should China make visible efforts to rebalance trade between the two, we see the likelihood of the US labelling China a ‘currency manipulator’ falling sharply.
Have a great day.