FX Daily, August 04: Does the Employment Report Matter?

Swiss Franc

The Euro has fallen by 0.15% to 1.1475 CHF.

EUR/CHF and USD/CHF, August 04

Source: markets.ft.com - Click to enlarge

FX Rates

There are some chunky option strikes that could come into play today. There are 920 mln euros struck at $1.1850 that expire today. There are A$523 mln struck at $0.7950 expiring today. There are $680 mln struck at CAD1.2550 that will be cut.

The MSCI Asia Pacific Index eked out a small gain today and gained 0.8% on the week. It is the fourth consecutive weekly advance. The Dow Jones Stoxx 600 is up about 0.25% on the week, and nearly half of it is being recorded today. Recall that it fell 2.7% in June and 0.4% in July. Benchmark 10-year yields fell in Asia after US rates fell yesterday. European rates and the US are up around one basis point today.

FX Daily Rates, August 04

- Click to enlarge

The note of caution that has peppered comments by some officials is not based on disappointment with the labor market per se. Job growth continues at a pace that is gradually absorbing slack in the labor market. The three-month average stands at 194k, just above the 2016 average of 187k.

FX Performance, August 04

- Click to enlarge

United States

The main challenge is the price pressures remain subdued. Remember that in the traditional view, headline inflation converges with core inflation and core inflation is driven by wages. The average hourly earnings component of the jobs report is the most important in the current environment. Last July hourly earnings rose 0.4%. That means that a 0.4% increase is needed in July simply to keep the year-over-year pace at the 2.5% seen in June. It has not risen by more than that since November 2008 (0.5%). The three, six, and 12-month average is at 0.2%. Not to put too fine of a point on it, but the real issue is how much will the year-over-year pace slow:  2.3%-2.4%. It finished last year at 2.9%.

There have been three economic developments to report. First, in the context of the US employment report, Japan is also experiencing little wage pressure despite its tight labor market conditions. Cash wages fell 0.4% in June year-over-year. This was a shock. Economists expected a 0.5% gain after 0.7% in May. It is even worse when adjusted for the inflation. Real cash earnings fell 0.8% year-over-year.  It is the weakest in two years. Prime Minister Kuroda has not recovered in the polls. This week’s cabinet reshuffle may better protect the LDP, but it is not clear if there is an alternative to Abenomics.

U.S. Average Weekly Hours, July 2017

Source: Investing.com - Click to enlarge

Moreover, if anything, the Washington drama raises concerns about the debt ceiling and the spending authorization that Congress must act on with limited time to maneuver in September. Some see these issues impacting the Fed’s decision on its balance sheet. There have been some distortions in the T-bill market as investors seek to avoid the period in which the problem may be most acute (mid-October).

Germany

German factory orders rose 1.0% in June, more than the market expected. The year-over-year rate rose to 5.1% from the prior month’s 3.8% pace. Domestic orders rose 5.1%, while foreign orders fell 2%. It is a volatile report, and not much should be made of one month, but the rise of the euro and the decline in orders for export warns that German exporters may be feeling a competitive pressure. That said if German exporters are being squeezed from the stronger euro so would other exporters, especially in the south.

Germany Factory Orders, June 2017

Source: Investing.com - Click to enlarge

Australia

The Reserve Bank of Australia shaved this year’s growth forecast (through mid-2018) by 0.25%-0.5%, with the strong currency providing a headwind. It did revise up 2019 growth by 0.25% to 3%-4%. Separately, Q2 retail sales were a bit firmer than expected at 1.5% (vs. 1.2% median forecast in the Bloomberg survey). I Retail sales rose 0.2% in Q1.

Australia Retail Sales QoQ, Q2 2017

Source: Investing.com - Click to enlarge