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- USD loses ground on soft wage data
- ISM Manufacturing beats expectations and boosts USD
- Capital Economics says faltering global economy to support USD.
The Pound was bid against the U.S. Dollar after January's labour market report delivered a damp wage growth number, but a better-than-forecast ISM Manufacturing release soon saw the Dollar turn around and head higher.
Markets were always likely to focs on the ISM Manufacturing Report as it offers the most up-to-date snapshot of U.S. economic activity, whereas the jobs report was more backward looking.
ISM Manufacturing for January read at 56.6, well ahead of the 54.2 forecast by markets, the beat was driven by strength in production and new orders from domestic customers and suggests the U.S. economy has started 2019 on a strong footing.
The new export orders index fell to its lowest level since 2016, but remains slightly above 50, and likely reflects the impact of weaker global demand and tariffs. The prices paid sub-index fell to its lowest level since 2016, although that simply reflects the trend in oil prices which should partly reverse in the months ahead along with higher oil prices. Construction spending beat expectations, rising by 0.8% in November, driven by private residential spending.
"Two more positive readings for the U.S. economy will add to support for the USD today and see yields rise," says Katherin Judge, analyst CIBC World Markets.
The data suggests the U.S. economy has gotten off to a decent start to the year, despite inclement weather and the government shutdown, and will therefore draw questions as to whether or not the U.S. Federal Reserve was wrong to signal caution this week on raising interest rates any further in light of growing concerns the economy is starting to slow.
Surprising Payrolls, Soft Wages
The U.S. economy created 304k new jobs in January when markets had been looking for only 165k, although the Bureau of Labor Statistics downgraded its estimate of job numbers for December, from 312k to just 222k.
Despite the sharp jump in January, on aggregate the U.S. economy created a substantially lesser number of jobs in the last two months than economists and markets had previously thought. Furthermore, the unemployment rate rose by 10 basis points to 4% when consensus had been for it to hold steady at 3.9%.
However, it was always likely to be wages that traders were watching.
"Those moves should prove temporary and be unwound next month. The only real negative from the release was the slight 0.1% monthly gain in wages, although even here past revisions meant that the annual rate, at 3.2%, was in line with the consensus view," says Andrew Grantham, an economist at CIBC Capital Markets.
The rate of average hourly earnings growth came in at just 0.1% for January, down from 0.4% previously and well below the market consensus for a reading of 0.3%. However, revisions to prior numbers meant the annual pace of pay growth declined by only 10 basis points to 3.2%, in line with the consensus.
The knee-jerk reaction to the jobs numbers saw a rise in the Dollar, however this soon gave way to declines.
"Quite the topline surprise for payrolls but quite the muted reaction in the USD however. We think this is reflective of a well heeded message of patience by the Fed that suggests limited scope for tightening in the near future even in the face of good data," says Mazen Issa, Senior FX Strategist with TD Securities.
Markets care about the labour data because falling unemployment and improving job creation are thought to put upward pressure on wages. Pay growth leads to increased demand in an economy and puts upward pressure on inflation, with implications for interest rates and financial markets.
Changes in interest rates, although only normally made in response to movements in inflation, impact currencies because of the influence they have on capital flows and their allure for short-term speculators.
"It is difficult to make firm conclusions based on today’s labour market report given the influence of the government shutdown, but the strong numbers still make it hard to become more negative on the labour market," says Ander Svendsen, an economist at Nordea Markets.
The Dollar index was quoted -0.75% lower at 95.49 following the release Friday and has now fallen -0.53% thus far in the 2019 year. The Pound-to-Dollar rate was -0.34% lower at 1.3062 having been as low as 1.3043, the Euro-to-Dollar rate extended gains to trade at 1.1457.
Friday's payroll data comes just days after the Federal Reserve (Fed) suggested strongly in its January statement that the interest rate hiking cycle that supported the Dollar last year could now be over, which has placed a question mark over the outlook for the greenback.
"We doubt that the weakness in the US dollar since the FOMC’s meeting ended on Wednesday will last. Given our view that equity markets around the world will come under pressure again this year, we think that the dollar will benefit from safe-haven flows," say Simona Gambarini, an economist at Capital Economics.
Fed officials did as they were expected to do and held the Federal Funds rate range at between 2.25% and 2.5% on Wednesday, but they also said in the statement accompanying the decision that they aren't yet sure they'll even need to raise rates at all this year.
Previously the Fed had said that "further gradual increases" in interest rates would be required to prevent inflation from rising meaningfully above the 2% target, which was a staple line that has appeared in almost all policy statements during the last three years or more.
But the Fed abandoned that judgement this week and is now simply going to be "patient" while it waits for U.S. and global economic developments to dictate whether any further rate rises are going to be necessary over the coming quarters.
"While we agree that the case for further rate hikes has weakened, we don’t think that the outlook for the economy is benign. Indeed, we think that it is only a matter of time before the cumulative effect of previous monetary tightening and fading fiscal stimulus start taking a toll on the economy," says Gambarini.
Gambarini recalls that when the Fed paused its rate hiking cycle back in 2016 the Dollar continued to rise over subsequent months, despite interest rate markets pricing out future hikes that had previously been taken for granted. She forecasts that a similar thing will happen this time around.
"We think that the current bout of Dollar weakness will be short-lived. In fact, we expect the greenback to be a major beneficiary of a move away from risky assets this year as growth in the world’s largest economies slows, dragging stock markets down," Gambarini projects.
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