The Most important data point of 2015: NFP and the implications
Our view for both the UK and US has been that rates will remain lower for longer than many in the market have been anticipating.
With the Bank of England's inaugural "Super Thursday" having a more dovish tone than many were expecting that scenario seems more likely in the UK. Indeed Swiss bank UBS has pushed its own forecast for the first UK rate rise out to February 2016. So it's nice to be travelling in such good company.
Things in the USA are not so clear cut however and I don't believe I am alone in thinking that we have had plenty of mixed signals from the regional Federal Reserve Governors, Janet Yellen herself and the economic data this year.
The Fed has been cautious and after nine years without a rate rise it is anxious not to repeat the mistakes of 1937/1938. When it raised rates too quickly and inadvertently derailed the fragile economic growth, which despite a hasty about face on rates did not immediately return.
The question the Fed must ask itself is this: "Is the US economy now sufficiently robust to stand on its two feet as it moves along the path to normalised interest rates?"
Today's employment data could provide the answer
Job creation but at a decreasing rate
June saw a read of 223,000 new jobs but as we can see from the chart below the trend in job creation, as measured on annual basis (denoted by the brown line) has been declining since March, which could suggest that US economy as whole may be slowing down. Please see the following chart: gyazo.com/b4ed7a1c77...f486279094eabd9b4278
Who will move first?
This relates to the chart idea.
To some extent we have what amounts to a global macro game of chicken between the UK and the USA and we are not certain who will blink first. This tension and jockeying for position is of course played out in the GBP USD exchange rate or cable as it's commonly known. Comments made by Bank of England Governor Mark Carney, over the last couple of months, implying that UK rates could move sooner than anticipated had seen cable rally to as high as $1.5853 and though it sold off to as low as 1.5330 in early July it had until yesterday remained above its 200 day ema line and had tested up to 1.5670 on a regular basis.
However yesterday's price action is took us back below the uptrend that had been in place since the mid-April lows and below the 20, 50 and 200 day ema lines into the bargain. Intraday cable tested back to and below the July 24th low of $1.5467.
More job creation indicates a September rate rise in the USA?
The orthodoxy for today is that should we see a strong (higher) July Non-Farm Number i.e. the creation of more jobs in the USA, then that would mean a September rate rise which in turn should see the Dollar rally further against Sterling and other currencies, as the greenback claims its first mover advantage. Any move back through $1.5467 could open the door to $1.5415, $1.5364, the low on July 10th and the 8th of July low at $1.5330. With the 5th of June low at 1.5191 a more pessimistic level thereafter. Of course a disappointing NFP number, as we saw with the ADP private sector payrolls number on Wednesday, which came in at 185,000 vs a forecast of 210,000, would likely see the Dollar sell off , perhaps allowing Sterling to move back above its key moving averages.
Just before you go...
Consider this however. The historical data (seen here gyazo.com/9972b82b08...72c95b14589052e52321) suggests that the dollar does not automatically strengthen during periods of rising interest rates. As we can see from the chart below, that plots the path of Dollar Index during five previous interest rate cycles (dating back to 1994) Over anything other than the very short term the dollar, on this measure, actually weakens as US rates rise.
With the Bank of England's inaugural "Super Thursday" having a more dovish tone than many were expecting that scenario seems more likely in the UK. Indeed Swiss bank UBS has pushed its own forecast for the first UK rate rise out to February 2016. So it's nice to be travelling in such good company.
Things in the USA are not so clear cut however and I don't believe I am alone in thinking that we have had plenty of mixed signals from the regional Federal Reserve Governors, Janet Yellen herself and the economic data this year.
The Fed has been cautious and after nine years without a rate rise it is anxious not to repeat the mistakes of 1937/1938. When it raised rates too quickly and inadvertently derailed the fragile economic growth, which despite a hasty about face on rates did not immediately return.
The question the Fed must ask itself is this: "Is the US economy now sufficiently robust to stand on its two feet as it moves along the path to normalised interest rates?"
Today's employment data could provide the answer
Job creation but at a decreasing rate
June saw a read of 223,000 new jobs but as we can see from the chart below the trend in job creation, as measured on annual basis (denoted by the brown line) has been declining since March, which could suggest that US economy as whole may be slowing down. Please see the following chart: gyazo.com/b4ed7a1c77...f486279094eabd9b4278
Who will move first?
This relates to the chart idea.
To some extent we have what amounts to a global macro game of chicken between the UK and the USA and we are not certain who will blink first. This tension and jockeying for position is of course played out in the GBP USD exchange rate or cable as it's commonly known. Comments made by Bank of England Governor Mark Carney, over the last couple of months, implying that UK rates could move sooner than anticipated had seen cable rally to as high as $1.5853 and though it sold off to as low as 1.5330 in early July it had until yesterday remained above its 200 day ema line and had tested up to 1.5670 on a regular basis.
However yesterday's price action is took us back below the uptrend that had been in place since the mid-April lows and below the 20, 50 and 200 day ema lines into the bargain. Intraday cable tested back to and below the July 24th low of $1.5467.
More job creation indicates a September rate rise in the USA?
The orthodoxy for today is that should we see a strong (higher) July Non-Farm Number i.e. the creation of more jobs in the USA, then that would mean a September rate rise which in turn should see the Dollar rally further against Sterling and other currencies, as the greenback claims its first mover advantage. Any move back through $1.5467 could open the door to $1.5415, $1.5364, the low on July 10th and the 8th of July low at $1.5330. With the 5th of June low at 1.5191 a more pessimistic level thereafter. Of course a disappointing NFP number, as we saw with the ADP private sector payrolls number on Wednesday, which came in at 185,000 vs a forecast of 210,000, would likely see the Dollar sell off , perhaps allowing Sterling to move back above its key moving averages.
Just before you go...
Consider this however. The historical data (seen here gyazo.com/9972b82b08...72c95b14589052e52321) suggests that the dollar does not automatically strengthen during periods of rising interest rates. As we can see from the chart below, that plots the path of Dollar Index during five previous interest rate cycles (dating back to 1994) Over anything other than the very short term the dollar, on this measure, actually weakens as US rates rise.