Article / 05 August 2016 at 5:01 GMT

3 Numbers: US payroll gains to be enough for one hike this year

Blogger / MoreLiver's Daily
  • German factory orders should maintain their year-on-year growth rate
  • UK house prices should post a fall in June – but how deep will the slump be?
  • A UK property crash could bring trouble in the banking sector and a recession
  • US payrolls expected to increase by 179,000 – that's good, but not great

By Juhani Huopainen

Today’s key event will be the US jobs report, but the actual impact of the report should remain limited. Investors have seemingly been getting long USD in the past few days in case of a monster jobs report, but the EURUSD is still range-bound.

Meanwhile German factory orders and Britain's house price index will be the most interesting releases during the European session. The latter could turn out to be the day’s key report for traders. On top of the above releases, June industrial production data will be released for Spain and Italy.

 On track for growth ... despite noise about the deteriorating global outlook, there are welcome signs that German manufacturing remains healthy. Photo: iStock

Germany June Factory Orders (0600 GMT). The very volatile but much-followed early warning signal of the euro area’s biggest economy is expected to show manufacturing orders increasing 0.5% from month ago.

Total orders rose 3.7% from year ago in May, and as orders tend to move hand-in-hand with the actual production, this suggests the German manufacturing base remains healthy despite all the noise about deteriorating global outlook.

UK July Halifax House Price Index (0730 GMT). In the three months to June, house prices rose 8.4% from a year ago. The growth rate has been trending lower since peaking at 10.1% in March.

On a monthly basis, prices rose 1.3% in June. In July, the year-over-year growth rate is expected to have remained largely unchanged, but on a monthly basis the prices are expected to have fallen by 0.2%.


Chart source: Saxo Bank

Several property funds, especially those that have been investing in commercial real estate, have been hit by large-scale redemptions and have been forced to lock up. Even though UK monetary policy is set to remain easy, the deteriorating growth outlook is straining real estate prices as well.  The Markit construction purchasing manager index fell below the 50-level in June and remained depressed in July, suggesting construction is contracting.

The collapse in oil prices, economic sanctions against Russia, overall loss of safe haven-flows to the UK and lastly the possibility that several companies might be forced to relocate after Brexit to some other European Union member nation have possibly pricked the UK real estate bubble. If the real estate boom is over for now, it will remove an important growth component for the UK economy. If the boom is about to end with a crash, subsequent trouble in the banking sector and a recession would be almost certain.

Worse-than-expected price falls in the UK housing market would lead to weakening GBP. Since the Brexit referendum the GBPUSD has been trading in a range and is approaching that range’s bottom. The pair should turn higher from the 1.3050-1.3100-area, or a break to new lows would be probable.

 Chart source: SaxoTrader

The Halifax press release will be posted here. For a longer view of the index, see here.

US July Employment Report (1230 GMT).  The nonfarm payrolls are expected to have increased by 179,000 in July, following a surprisingly large increase of 287,000 in June. Unemployment rate in July is seen to have decreased a bit to 4.8%, after jumping 0.2% points to 4.9% in June.

 Chart source: Saxo Bank

The ADP private sector payroll number for July was reported last Wednesday, and it a net increase of 179,000 jobs. While the relationship is volatile, this suggests that today’s nonfarm payroll figure should be easily met.

The following chart shows that during the past few years the ADP report has had less whipsawing, as the weird monthly jumps seen in the establishment report have not been seen in the ADP report.

ADP vs establishment
 Chart source: Saxo Bank

Overall, it seems like the average monthly job gains are decreasing a little from what we’ve seen during the past five years or so, but that should be expected at this late stage of the recovery.

As no key decision is ahead for the Federal Reserve, today’s report is not expected to be a game changer. If anything, it is expected to be robust enough to justify one more rate hike in 2016. The next big hints will probably be the Fed’s July meeting’s minutes, to be published on August 17.

– Edited by Robert Ryan

For more on forex, click here.

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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