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US December NFP +156,000 – Wage Growth Will Spur the FED to Accelerate Rate Increases

The United States Department of Labor Bureau of Labor Statistics announced on Friday that total nonfarm payroll increased by 156,000 in December and the unemployment rate ticked up a tad to 4.7%. The revisions to the previous months saw the October number drop from 142,000 to 135,000 while the November figure was revised up to 204,000 from 178,000. The all important (ok not really) 3 month average now stands at 165,000 per month. Of more importance is that average hourly earnings in December increased by 10 cents to $26.00. This takes the 2016 average to 2.9% and this will get the FED to increase rates at a faster clip as wage growth typically is the precursor to inflation in a tight employment market such as in the US.

As tough as it is to find work these days, one can’t ignore the average overall unemployment rate being below 5% for all of 2016. By historical standards, 5% is considered to be ‘full employment’ which is when all available labor resources are being used in the most efficient way possible. Those that are unemployed within the ‘full employment’ are considered to be structurally or cyclically unemployed. When full employment is encountered, wages increase as the supply of labor shrinks and employees become more valuable. As those who are employed receive increasing wages, their disposable income increases and this combination has previously produced inflation.

This is the type of inflation that the FED will notice. This is the type of inflation that the FED has wanted to see for many years. This is the inflation that has to be contained by raising interest rates. This is the inflation that many central bankers in the developed world want themselves. This is the inflation that we have been hearing about that was expected in the ‘medium term’. This is the inflation that could quite possibly wreck the government-induced bubble in the bond market and send the US dollar to new highs in 2017.

As the inflation scenario unfolds in the US, the FED will quickly have to be seen to be ‘out in front of it’ meaning that they have the inflation genie under control. The FED will have to raise rates sooner and higher than the market previously thought. The difficulty here is that the widening interest rate differential globally will continue to fuel demand for the US dollar. In addition to the widening interest rate differential between the US and say Europe (socialized economy) or Japan (Abi-normal), the fiscal machine looks set to roar again in the US.

Before the new president is even sworn in on the 20th the rumors are circulating and theories are being tested on what business in America might be like with a Trump presidency. It will be very interesting to see who, what, where, when, and how the fiscal beast is unleashed and this change in approach provides my macroeconomics students with a daily update on how Trumpism is going to make America great again.

Rising US interest rates and the belief that a fiscal boost from the incoming administration will be enough to keep the US dollar headed higher, and probably a great deal higher is 2017. If the US bond market falls out of bed and volatility continues to rise in that market one should also brace for increased currency volatility as well. Stay long US dollars my friends.

 

keith@underwoodfx.com

UnderwoodFX.com 

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Trump Change

What the Trump victory means for the FX market

OK so you’re as surprised as everyone else at the outcome of the US election and you have made currency predictions for next year. You probably added a slightly larger degree of uncertainty after the shock UK Brexit vote, but you none the less polled your FX banks for their forward looking strategic FX views, did your own research, and felt reasonably comfortable with your work product. What does a President Trump mean for the FX market? Who are the winners and losers?

Winners

  1. The US Dollar
  2. The Swiss Franc
  3. The Japanese Yen

The US dollar is still the most traded currency in the $5.1 trillion a day FX market according to the latest BIS Triennial Survey. It has been strengthening since 2011 (see broad US Dollar index chart) fredgraphin the belief that the FED will normalize (raise) interest rates as job creation continues and inflation reaches 2%. As a macroeconomics professor, my US Dollar view is torn between what appears to be two divergent Trump policies, isolationism and lower taxes. Isolation has an implicit lower dollar to help US exports, while lower taxes foster a stronger dollar over time as the US economy strengthens.

In isolationism, I don’t see Trump supporting a ‘weak dollar’ or ‘a weaker Dollar’. Weak is not in the Trump vocabulary. Period. I think the US Dollar will rise as the US economy breaks with Obama policies and adjusts positively to the Trump lower corporate taxes (the US has one of the worlds highest corporate taxes) that promote higher growth and higher tax revenues (higher tax rates increases tax avoidance and lowers tax receipts), higher spending, and higher inflation. The US Dollar is set to rise further.

The Swiss Franc is regarded as a safe haven currency when uncertainty and volatility is prevalent in the markets. Short-term traders (generally trades held less than an hour or two) will trade the franc back and forth today to make a few shekels and for those that have less enthusiasm for a Trump economic turnaround, they will find themselves increasing their exposure to the franc. As my regular readers know, I’m not the biggest fan of the Swiss Franc, given their negative interest rate policy (Negative Interest Rates: A Disincentive to Risk), but the safe harbor status of the franc can’t be ignored in times of uncertainty. Over the course of 2017 the Swiss Franc will maintain its store of value in the FX market.

The Japanese Yen has been manipulated for years by the BOJ trying to keep the yen artificially weak in the face of badly performing monetary policies and unrealistic inflation goals. Readers of my posts know well that I don’t believe that manipulation in FX ever works (3 Currency Intervention Lessons Never Learned) over time and because the Japanese have been at this for many years I think the Yen is poised to strengthen once this calamity curtain is pulled back. I have recommended buying Yen from 112.00 and I see little standing in the way of 95.00 aside from verbal intervention, which doesn’t work.

Losers

  1. Mexican Peso
  2. Canadian Dollar
  3. China

Trump campaigned on terminating NAFTA and calling it the worst trade deal ever signed anywhere. Our neighbors to the North and South will see their currencies suffer as uncertainty over a future without NAFTA lingers.

China is and has been an easy target for Trump. He will continue to skewer the Chinese on trade and currency manipulation all during his presidency. He will do this to keep the appearance of pressure on the Chinese to enact reforms that benefit the US but the reality is that China does nothing that is not in the interest of China.

keith@underwoodfx.com

www.UnderwoodFX.com

 

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US April Payrolls a Tepid +160,000 – Buy YEN and Volatility

The headline number is 20% below the previous 3-month average of 200,00 jobs created and the February and March figures were revised down by 19,000 jobs. While the NFP number is discouragingly below expectation of 202,000, average hourly earnings has risen by 2.5% over the year. While encouraging, hourly earnings alone will not provide enough ammunition for the FED to raise rates come June. External factors such as the slowing growth in China, Japan, Europe, and US will mix with negative interest rates to halt any hopes of increases in inflation. This toxic combination of low growth and stagnant inflation will create the next bout of volatility in equity, rates, and FX.

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FX Volatility on the Rise


Major currency pairs (GBP, YEN, USD, CHF) have seen significant increases of implied volatility over the course of the last several months.
Implied cross volatility pairs such as AUD/YEN and NZD/YEN have moved into crises levels not seen since 2011.
Equity portfolio managers re-hedging (liquidating dollar positions), against established long USD positions.
Market uncertainty of what the Yellen cakehole cannon might say tomorrow.


 

Equity portfolio managers (PM’s) are heading for the door. They have been selling winners (Netflix and Amazon for example) to lock in profits against the losses incurred on their dogs (European energy and banking). This liquidation (fancy word for sell at market order or ’Get me out!’) of positions is forcing PM’s to hedge their resulting USD exposure. They have sold USD aggressively over the last several months in the face of a market that has been long USD positions.

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3 Things to consider about the August NFP @ +173,000

  • Revisions to June and July NFP figures of +44,000 brings the 3 month average gain to +221,000
  • Average hourly earnings are up 0.56% since June and up 2.2% from August 2014
  • August NFP of +173,000 is 30% below the 12 month average gain of +247,000

 

Looking through the lens of the FED, there are positives and negatives about today’s NFP release. On the face of it, a sub-200k number is a slight cause for concern, as the bobble heads will stoke a return Read more

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May US Nonfarm Payrolls Surprise to the Upside

Total US nonfarm payroll employment rose by 280,000 in May, the unemployment rate remained at 5.5%, and pay for employees accelerated. March NFP was revised from +85,000 to +119,000 and the change for April was from +223,000 to +221,000. With these revisions, employment gains in March and April were 32,000 higher than previously reported and the average monthly gain over the prior 12 months stands at 251,000. Job gains occurred in professional and business services, leisure and hospitality, health care, and mining employment continued to decline.

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Thank you IMF for validating my US interest rate view

For those that have been reading my blog on ACurrencyAffair.com, you may well remember that I posted a piece in February (“The FED will not raise interest rates in 2015”) of this year that the perfect storm of a strong dollar, the oil collapse, and tepid global growth would delay a US rate rise until early 2016. Today, the IMF’s annual review of the state of the US economy has agreed with two out of three of my points (strong dollar and oil) to urge the FED to delay lifting rates until early 2016.

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Notable events the week of 30th March 2015

Lots of data out this week but all eyes will be on the US employment figures due out on Friday.  Until then, one should expect range trading in currencies as Yellen’s speech on Friday provided little new information about when rates will rise and it’s all about upcoming wage growth and core consumer price data.

Monday 30th:

Eurozone business climate index 0.18 expected versus 0.07 prior

Eurozone consumer sentiment index -3.7 expected versus -3.7 prior

Eurozone economic sentiment index 103 expected versus 102.1 prior

German CPI (Prelim.) %m/m 0.4 expected versus 0.9 prior

German HICP (Prelim.) %m/m 0.5 expected versus 1.0 prior

US Personal income %m/m 0.3 expected versus 0.3 prior

US Personal spending %m/m 0.2 expected versus -0.2 prior

US Fed’s Fischer speaks on monetary policy and stability in Georgia

Tuesday the 31st:

German retail sales %m/m -0.7 expected versus 2.3 prior

German unemployment change -14k expected versus -20k prior

UK GDP (3rd est.) 0.5 expected versus 0.5 prior

Eurozone flash HICP %y/y -0.1 expected versus -0.3 prior

Eurozone Unemployment 11.2% expected versus 11.2% prior

US Fed’s Lacker speaks on economic outlook in Richmond

US S&P Case-Shiller home price %y/y 4.6 expected versus 4.46 prior

US Chicago PMI index 52.4 expected versus 45.8 prior

US Consumer confidence index 96.6 expected versus 96.4 prior

Japan Tankan index 14 expected versus 12 prior

Wednesday the 1st:

China PMI Manufacturing index 49.7 expected versus 49.9 prior

China HSBC/Markit PMI Manufacturing index 49.3 expected versus 49.2 prior

French Manufacturing index 48.2 expected versus 48.2 prior

German Manufacturing index 52.4 expected versus 52.4 prior

Eurozone Manufacturing PMI index 51.9 expected versus 51.9 prior

US ADP employment survey 230k expected versus 212k prior

US Manufacturing PMI index 55.1 expected versus 55.3 prior

US ISM Manufacturing index 52.5 expected versus 52.9 prior

US Vehicle sales 16.9mm expected versus 16.16mm prior

Thursday the 2nd:

UK CIPS/Markit construction PMI index 60.4 expected versus 60.1 prior

US Initial claims 285k expected versus 282k prior

Friday the 3rd:

US Non-farm payrolls 250k expected versus 295k prior

US Private payrolls 245k expected versus 288k prior

US Unemployment 5.5% expected versus 5.5% prior

 

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Notable events the week of 23rd March 2015

Expect more headline trading this week with a plethora of Fed speakers littering the calendar and Bullard, the loose cannon) speaking twice this week (see below).  The best one is saved for last though, as Yellen speaks on Friday afternoon, near the close of the market.  I would imagine that weekend gamma will be expensive, due the timing of this speech, and the potential for the Yellen cake hole cannon to let loose.

 

Monday the 23rd:

US Fed’s Mester speaks in Paris

US Existing home sales 4.94m expected versus 4.82m prior

US Fed’s Williams speaks on economic outlook

US Fed Vice Chair Fischer speaks in New York

Tuesday the 24th:

China Flash HSBC/Markit PMI manufacturing index 50.4 expected versus 50.7 prior

Eurozone Flash Composite PMI index 53.6 expected versus 53.3 prior

Eurozone Flash Manufacturing PMI index 51.5 expected versus 51 prior

Eurozone Flash Services PMI 53.9 expected versus 53.7 prior

UK CPI %m/m 0.3 expected versus -0.9 prior

US Fed’s Bullard speaks on Global Recovery in London

US CPI %m/m 0.1 expected versus -0.7 prior

US CPI %m/m (ex food & energy) 0.1 expected versus 0.2 prior

US Flash Manufacturing PMI index 54.7 expected versus 55.1 prior

US New home sales 475k expected versus 481k prior

Wednesday the 25th:

German IFO Business climate index 107.3 expected versus 106.8 prior

German IFO Current conditions index 111.8 expected versus 111.3 prior

German IFO Expectations index 103 expected versus 102.5 prior

US Fed’s Evans speaks on the economy & monetary policy in London

US Durable goods orders %m/m 0.5 expected versus 2.8 prior

Thursday the 26th:

US Fed’s Bullard speaks on US Economy & Policy in Frankfurt

Eurozone M3 Money supply %y/y 4.3 expected versus 4.1 prior

UK Retail sales (ex auto, fuel) %m/m 0.3 expected versus -0.7 prior

US Initial claims 295k expected versus 291k prior

US Fed’s Lockhart speaks on Economy & Monetary Policy in Detroit

Canada BoC’s Governor Poloz to give speech

Japan CPI Core (nation) %y/y 2.1 expected versus 2.2 prior

Japan Real Household Spending %y/y -3.2 expected versus -5.1 prior

Japan Unemployment % 3.5 expected versus 3.6 prior

Japan Retail Sales %m/m 0.9 expected versus -1.9 prior

Japan Retail Sales %y/y -1.4 expected versus -2 prior

Friday the 27th:

US GDP Annualized (3rd est.) %q/q ann 2.4 expected versus 2.2 prior

US University of Michigan sentiment index 91.8 expected versus 91.2 prior

US Fed’s Yellen speaks on Monetary Policy in San Francisco

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Keith@UnderwoodFX.com

 

 

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The Fed’s Dual Mandate

Every person that has taken a macro-economic course is aware of the Fed’s dual mandate, but for those that haven’t, a bit of history to get this blog post going. In 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:

     “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

The dual mandate being consolidated down to maximum employment and stable prices, which equates to approximately 5.35% unemployment rate and 2% inflation. With the economy creating about 260,000 jobs a month and the unemployment rate at 5.5%, the Fed is accomplishing the employment mandate. Unfortunately, the inflation rate is running well below the 2% target rate and, by it’s own admission, the Fed really doesn’t think it will reach that level until 2016, as stated by is most recent economic assessment from December 2014. Their data is below:

We are in the midst of the most dramatic deflationary pressures on the US economy since the 2008 crisis. May I remind you of the effects of dramatically lower oil, a strong US dollar, and tighter money supply had on US CPI?

I am not suggesting that we have negative CPI in our midst, but I can’t ignore the potential for downward pressure on inflation with these powerful forces, once again acting in unison. In 2008 when oil (WTI) fell 69% and the dollar trade weighted index (TWI) soared 20%, CPI dropped from 5.5% to -2%! In the last year, oil is 58% lower and the dollar TWI is 11.4% higher. A back of the envelope estimation is that CPI could drop 3% or 4%? If the Fed acts according to it’s dual mandate, I can’t see how it moves rates higher, while CPI has the historical prospect of falling significantly in the coming months. Yikes!

Next weeks Fed meeting should prove interesting because the world will be watching to see if they remove the word ‘patient’ from their statement, which would signal that they are open to raising (normalizing) rates. While this development, if it occurs, will be seen as opening up the potential to raise rates, it will be difficult for voting members to square with the Fed’s dual mandate and raise rates while inflation is poised to head lower.

 

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Quick, discreet, and so worth the risk.

 

Keith@UnderwoodFX.com