Payrolls Feed Dollar Confidence As BoE Sends Sterling Stumbling

Weekly Report - 08/08/2016

Strong US Job Creation Sends the Dollar Index Higher as UK Rate Action Weighs on the Pound

The US nonfarm payrolls figure on Friday managed to come in well above market expectations, beating the consensus estimate by a wide margin, helping renew confidence in the potential for further interest rate normalization in the US.  Meanwhile, the Bank of England and Reserve Bank of Australia eased policy to new record lows in an effort to remain accommodating.

Last Week

In spite of the disappointing outlook conveyed by the most recent FOMC decision, labor market fundamentals in the United States continue to display improvement as evidenced by the latest job creation figures published by the Bureau of Labor Statistics last week.  According to the nonfarm employment numbers, US payrolls jumped by 255,000 during the month of July, beating expectations of 180,000 jobs added.  Adding to the optimism was the revision higher of the June figures to 292,000.  However, the unemployment rate held steady at 4.90%, instead of matching estimates of a fall to 4.80%.  The announcement sent the US dollar higher versus peers, leading to the currency to a gain on the week and reversing gold’s momentum higher.  Meanwhile, across the Atlantic, the Bank of England opted to accommodate monetary policy on the heels of a number of data points indicating an ongoing contraction in the country’s fundamentals as evidenced by shrinking services, manufacturing, and construction activity.  The BoE dropped interest rates by 25 basis points to 0.25% while also opting to expand quantitative easing by GBP 60 billion to GBP 435 billion.  Of that GBP 60 billion, GBP 10 billion will be allocated to purchases of corporate debt in an effort to spur business investment instead of further cash hoarding.  However, in terms of the outlook, the Central Bank warned about the prospect of further easing measures in light of revised growth expectations for 2017 and 2018.  The GBPUSD fell to just above the 1.3000 level as the pressure on the Pound grows.  Aside from the BoE decision, the Reserve Bank of Australia also approved additional accommodation for interest rates, dropping the benchmark to a record low 1.50% in an effort to stimulate growth and fight disinflation.  Weak retail sales expansion combined with risks in the housing market and an elevated Australian dollar continue to add to policymakers’ woes over the near-term as they seek to spur expansion.


The Week Ahead

The weekly reopening of global financial markets kicks off with Chinese trade figures, with the nation expected to remain under pressure following a sharp drop off in economic activity.  Exports and imports will be reported during the Asian session on Monday, with both figures expected to remain in 'contraction territory'.  Although the pace of decline in both areas is expected to taper significantly, with exports forecast to display a -3.00% fall outpaced by a -7.00% drop in import activity, any disappointment could raise the specter of additional interest rate cuts or falling bank reserve ratio requirements.  Meanwhile, the Chinese trade surplus is projected to fall slightly to $47.60 billion, followed by inflation later in the week, with annualized CPI forecast to slide to 1.80% growth from 1.90% reported a month earlier.  On a monthly basis, consumer prices are expected to rise to 0.10% in contrast to the -0.10% decline reported during June.  Producers prices are also forecast to see the pace of contraction ease slightly to -2.00% from -2.60% on an annualized basis. Aside from the dominant focus on China throughout the week, the Reserve Bank of New Zealand is set to decide on policy.  Market speculation is currently pointing to additional easing of interest rates by another 25 basis points to 2.00% from the current 2.25%.  This move coincides with dis-inflationary pressures facing the country, especially in light of Chinese disinflation which is being felt by trade partners across the globe.   Moving West, the week will end with important data from both the US and Euro Area, starting with preliminary German and Euro Area GDP figures set to be reported on Friday.  Growth in both is forecast to taper modestly, keeping in-line with the persistent headwinds facing the economies amid slowing global trade and uncertainties raise by the “Brexit” vote.  Finally, the week will close out on a note from the United States in the form of retail sales and PPI data.


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