Daily Brief

A red-hot Labor report

July payrolls surge by 528k

The latest U.S employment report put a spanner in the works for markets, when released last Friday. Markets had been expecting something close to half the number of published gains in the headline Nonfarm Payrolls. Furthermore, the overall unemployment rate dropped to 3.5% (from 3.6%). There was also no sign of any let-up in spiralling wages, as Average Hourly Earnings increased by 5.2% through July (YoY). This is clearly helping to squeeze company profit margins, which is why there was a wobble, if not a complete melt-down, in most of the major indexes on the day.

What did it mean for the Fed?

Well, the labor report should never mean nothing in isolation. There will be another Labor report (August), as well as key Inflation, growth and a plethora of consumer confidence updates, published ahead of the next FOMC meeting, and the Fed will always judge a trend, as opposed to one particular data set. However, the frothy U.S Labor market is clearly showing no signs of softening at the moment, and this has helped to cement expectations for larger Fed rate hike increases, certainly on the day as far as markets are concerned. In fairness, after recent hawkish chatter from key Fed officials this week, markets had already been boosting expectations for tighter U.S monetary policy. Furthermore, This Labor report will also help to detract talk of any imminent recession in the U.S after some wobbly recent weaker data, such as that soft growth report. But, as we say, it would be foolish to make a judgement on any one given data set.

The dollar took its cue

The recent trend of markets being boosted by weak data, and battered by stronger data, kind of played out through Friday. Equity markets wobbled, but did not turn the recent bullish trend by any margin. Risk assets were sold-off, but once again, the losses were fairly constrained on the day. Oil finished the week at its lowest point since February, but that move is as much to do with expected weaker demand, than supply constraints (for once). The greenback did react in a more obvious manner to the strong data, with the dollar rallying across the board, which is more typical of a risk-off environment. The dollar index (DXY) rose back above 106.00, with GBP/USD moving back below 1.2100, and continuing its slide after that shocking outlook on the UK economy from the BoE the day beforehand. The heightened volatility in USD/JPY continued on Friday, with the pair moving nearly as high as 136.00, having been as low as 130.60 on Tuesday. EUR/USD drifted below 1.0200, but remains well above the key parity region for the time being. German inflation (Tuesday) matters for the Euro.

Not a great Canadian labor report

There was an unexpected drop in the headline payroll gains in Canada for the second month in succession. Markets had been expecting a gain of around 20k, after the disappointing -43.2k reading previously, but it was not to be, with a further 30.6K declines. The headline unemployment rate remained steady at just under 5%. Whilst the report may have missed on the headline, markets still expect the BoC to continue with their aggressive rate hiking cycle. USD/CAD pushed back towards 1.3000 on the day, having been below 1.2800 at the beginning of the week.

What else matters this week?

Inflation reigns supreme, and after that jumbo payroll report on Friday, all eyes will be on the U.S CPI Inflation report on Wednesday. Analysts ‘expect’ a slight moderation. Markets are praying that they are right. On the same day, the latest German Inflation report is due. After the BoE gave the most pessimistic of updates after raising UK rates by 50bps last week, this week’s growth figures will clearly dominate the landscape for the pound. Markets expect a -1.3% print for June, after the previous month saw a 0.5% gain, which may have been a clear factor towards the BoE feeling more prepared to hike at that faster (0.5%) pace.

 

What else is happening today?

EUR - Sentix Investor Confidence

NZD – Electronic Card Retail Sales

GBP – BRC Like-For-Like Retail Sales

JPY – Money Supply

AUD - NAB’s Business Conditions/Confidence

 

 

 

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