There’s Growth But It’s Only Growing So Fast
The August read on the non farm payrolls data was positive, supports the idea of economic growth, shows a steady 2.5% YOY increase in wages but nonetheless did not impress the market. And that is a good thing in some ways. If the number had been too strong, if it had increased expectation of another interest rate hike it would have sent fear of the FOMC rippling through the market. As it is the number may be more than Goldilocks. It’s not too hot, not too cool with just the right amount of wage growth and an increase in unemployment to offset any thoughts that inflation may begin to creep into the economy.
The numbers are like this. The August NFP came in at 156,000 and below expectations for @175,000. This by itself is still good, not great, but OK save for the fact we got some negative revisions to June and July. The combined total is -41,000 which makes the August read defacto 115,000. The unemployment remains low but did tick up by a tenth to 4.4% suggesting that some folks have lost work, some new folks have entered/reentered the work force or a combination of the two. The labor force participation rate and the labor force to population ratio’s both held steady suggesting a small increase in both (assuming of course the population is always growing).
Weak Growth Strengthens The Dollar, What ?!?
The bright spot in the report and the detail that has lead me to believe, over the course of the past year, that the economy is building up to a surge in activity is the average hourly earnings. Average hourly earnings have been rising at a tepid month to month rate over the past year and came in at +0.11% for August. This is nothing to cause the FOMC to rush into a rate hike but the YOY figures suggest that core inflation could begin rising very soon, and that may push them into a hike. On a year over year basis the average hourly earnings have been increasing at a steady 2.5% and have been doing so for more than 12 months.
Bottom line is that this report was weak enough to further erode forward FOMC outlook with a caveat. There isn’t likely to be a rate hike at the next meeting but there is a good chance we’ll see activity pick up later this year and that will lead to a possible rate hike by end of year or early next year. This outlook is backed up by the Index of Leading Indicators which has been positive all year, and the KC Fed’s Index of Labor Market Conditions which has been signaling economic expansion for the last 24 months.
A look at the chart of the EUR/USD confirms this as well. The pair has been testing resistance as Draghi induced speculation strengthened the euro and falling FOMC outlook weakened the dollar. Resistance has been confirmed once and today it was confirmed again. The pair shot up on the initial release as traders were expecting solid data and firming of the dollar. This move was halted just below the 1.2000 resistance level and supported by the Stochastic RSI. The indicator is moving firmly lower following a strong bearish crossover at resistance. In my opinion this pair is in full reversal with downside targets near 1.8000, 1.6000 and 1.4000 in the near to short term.
The risks are plain. On the one hand US data may not firm, FOMC outlook may not increase and the dollar will flounder. On the other ECB outlook and Eurozone data may strengthen to a point offsetting strength in the dollar and keep the pair range bound.