Currency Note

Non-farm payrolls weaker than expected

By Christopher Nye October 8th, 2018

Non-farm payrolls

In recent times, markets around the world have become increasingly concerned about the inflationary impact of falling US unemployment, with some believing it could lead to a demand for higher wages. In addition, there is the threat to emerging markets – many borrowed heavily in dollars when interest rates were at rock-bottom levels following the global financial crisis, but with the Fed hiking rates eight times in the past three years and prolonged dollar strength, the cost of borrowing has significantly increased.

With that in mind, Friday was an eagerly anticipated day, as figures for US jobs and wages were on the schedule. It is fair to say the releases were a bit of a mixed bag. Non-farm payrolls came in at 134,000 in September, which was weaker than the 185,000 expected. However, the figure for August was revised up to 270,000 from 201,000 to make the preceding month even more impressive than originally thought.

Meanwhile, the unemployment rate dropped to 3.7% from 3.9% in the previous two months, which was the best figure since December 1969. Fears that annual wage growth would push through the 3% were not realised and the figure actually slipped to 2.8% from 2.9% in the previous period. Ultimately, it looks as if inflationary pressures in the US have lessened for now. Wall Street will receive the news warmly, as will the aforementioned emerging markets, but non-farm payrolls are notoriously volatile; as mentioned above, last month’s reading was revised upwards by 69,000 so we do not have the full picture yet.

Then there is the impact Hurricane Florence had on the figures. In mid-September, she hit the Carolinas which has almost certainly negatively impacted the reading. The next non-farm payrolls will be especially interesting. They might well be revised upwards and there could be a significant rebounding once the dust of Florence has settled. Still, the dollar weakened following the release, which helped sterling push through $1.31 to finish the week on a high. The pound didn’t fare too badly against the euro too and extended its gains following Thursday’s two-month high.

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GBP: UK house prices suffer sharpest fall since April

On Friday, there were two pieces of economic data which were worthy of our attention. The Halifax house price index for September showed that UK house prices fell by 1.4% last month, which is the sharpest fall since April 2018. It follows a 0.2% fall in August and was much lower than the 0.2% increase economists had predicted. The average price for a home in August was £225,995 and, on an annual basis, prices were 2.5% higher.

Sterling continued where it left off on Thursday by climbing higher against the dollar and broke through the $1.31 mark. Against the euro, the pound hovered around the €1.1350 mark throughout the day which eclipsed Thursday’s two-month high against the single currency. It’s quite remarkable that reports of a source contacting Reuters to say the bloc welcomed a fresh Brexit proposal is enough to strengthen the pound. Investors are clearly hoping for a breakthrough and any hint of a possibility is enough of a wave crest to sail on.

There is nothing on the economic data schedule today or tomorrow in the UK. Things pick up on Wednesday, when we will the balance of trade figures for August, the month-on-month GDP figures, construction and industrial output and manufacturing production. Combined, the releases should show us how the UK economy fared in August and we could see some sterling movements if there are some surprises.

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EUR: German factory orders smash forecast

The euro had a mixed week against the dollar and ended up pretty much where it began the week. It dipped below the €1.15 mark on Wednesday before two consecutive days of slight gains pushed it back safely above. For now, anyway. If 2017 was the euro’s year, then 2018 has been the dollar’s so far and with positive economic data continuing to come through from the US, this looks set to continue.

The only economic data release of note on Friday was the factory orders figures from Germany in August. The US posted its fastest rise for almost a year on Thursday and Germany’s impressed too. Economists had expected a 0.5% increase, but the figure actually came in at 2% which is the first increase for three months. It was mainly owing to a 5.8% surge in foreign demand.

It is a very quiet start to the week, but we will see the industrial production figures from Germany for August. Last time around, production shrank by 1.1%, but economists are predicting growth of 0.4% this time around. It will be interesting to see whether the experts are wide of the mark.

USD: jobless rate hits lowest mark since December 1969

There was some good news and some bad news for the US on Friday. Non-farm payrolls in September increased by 134,000, which was some way below the 185,000 the markets had been expecting. We did learn that August’s figure had been upwardly revised to 270,000 from 201,000 but September’s reading was the lowest for a year. Hurricane Florence hit the Carolinas in mid-September and is at least partly responsible for the disappointing figure.

However, the unemployment rate dropped to 3.7% from 3.9% in the previous two months and better than the 3.8% expected. It is the lowest jobless rate since December 1969. Guess which reading Donald Trump referred to in a Tweet? Average earnings came in as expected by falling to 2.8% from 2.9% the previous month. Ultimately, the readings point to less inflationary pressure in America than Wall Street had been fearing. The dollar duly weakened against sterling and the euro.

Like the UK, there are no releases from the US on today’s schedule. Tomorrow we will see consumer inflation expectations, while Wednesday brings us the mortgage application figures up to 5 October 2018. Things really pick up on Thursday, when we have the inflation rate for September, which is expected to dip to 2.4% from 2.7% in the previous period.

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