Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 04 August 2017 at 4:56 GMT

3 Numbers: Smaller nonfarm jobs gain likely, but in line with average

Blogger / MoreLiver's Daily
  • German factory orders expected to rise, manufacturing trending slowly higher
  • US trade deficit did not fall when the USD rallied; will the deficit now rise?
  • US nonfarm payrolls report expected to show an 'average' gain in jobs
  • This means average payroll gains, low unemployment and moderate wage rises

By Juhani Huopainen

Today’s data calendar has only one important release – the latest monthly US jobs report. There will be several data releases from Europe before that, but those are unlikely to create much interest among investors.

Next week’s calendar is also relatively empty, so politics especially in the US will probably be the main driver. There are no important central bank meetings in August and the summer holidays in Europe and US are also affecting the markets.

 Just another average day ... the July US jobs report is expected to have added exactly the same as the average of job increases during the past 12 months. Photo: Shutterstock

Germany June Manufacturing Orders (0600 GMT). The total orders are expected to have increased by 0.5% in June. The monthly changes are highly volatile, but longer-term, the factory orders are a good predictor of industrial production. 

The overall trend remains very stable and even low given the pre-crisis economic cycles, but even small changes gather a lot of attention ahead of Germany's election and because Germany has a lot of political power within the European Union – and tends not to love the European Central Bank's asset purchases.

Germa factory
Source: Destatis

US June Trade Balance (1230 GMT). The US trade deficit is expected to have fallen to $44.1 billion in July. The deficit has remained relatively unchanged for several years now. 

In the past the trade balance and the USD index have been positively correlated. A stronger USD has decreased defcits, while a weaker USD has increased them. The recent USD rally has not, however, decreased the deficits at all, and it is plausible that the latest weakening of the USD will sooner or later lead to slightly higher deficits.  

US July Employment Report (1230 GMT). The US economy is expected to have added 180,000 nonfarm jobs in July. This is less than the 222,000 gain in June, but exactly the same as the average of increases during the past 12 months. 

The unemployment rate is expected to decrease to 4.3%, which was last seen in May and is the lowest rate during the current economic recovery.
US jobs
Source: Saxo Bank

The ADP private sector survey was released earlier this week and showed an increase of 178,000 jobs – this is almost exactly in line with the median forecast for today’s payrolls, but the correlation between the two releases has not been perfect in the past – surprises happen.

The labour force participation rate seems to have bottomed, but it has not begun to increase.
US participation rate
Source: Saxo Bank

Despite the otherwise strong July report, wages did not increase much faster. Wages growth at 2.5% is higher than the average 2% seen in 2012-15. But in real terms this is not that great, as the inflation rate is also bit higher.

US Wages
Source: Saxo Bank

Decision-making at the Federal Reserve seems relatively immune to the low realised inflation reality. The core inflation rate is now around 1.6% and has been falling more or less steadily after it remained stuck at 2% during most of 2016. 

Perhaps the Fed is more tuned to the jobs market data, and believes that the low unemployment and the weaker USD will sooner or later lift inflation as well. Mind you, the 5-year, 5-year forward inflation expectation rate has been rising since mid-June and is now at 2%.

Or perhaps the Fed’s reaction function is dictated by the financial markets. The longer the relatively easy monetary policy continues, the more contracted the risk premia in stocks and bonds will become. It is the formation of this bubble in asset prices that the Fed is scared of. This means that the Fed could tolerate even relatively bad realised inflation for a while and also payroll increases below expectations.

For the Fed to back off from its slow tightening, the real economy has to tank hard, or we need to see a proper correction in the financial asset prices. 

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.
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