HomeContributorsFundamental AnalysisPoor Wage Growth Caps Further USD Gains

Poor Wage Growth Caps Further USD Gains

  • European equity markets gain between 0.5% and 1%. Gains mainly occurred in the European opening, welcoming political decisions in the US and the EU/UK. US stock markets opened open with gains of about 0.3/0.4% (Dow & S&P). The Nasdaq again outperforms (+0.75 %).
  • US payrolls beat forecasts in November as net job growth increased by 228k vs 195k expectations. The previous two months’ numbers were upwardly revised by 3k. The US unemployment rate stabilized at 4.1%, the lowest level since 2000. Average hourly earnings (0.2% M/M and 2.5% Y/Y) increased from October, but remained below consensus.
  • German exports fell unexpectedly in October (-0.4% M/M) while vibrant domestic demand pushed up imports (+1.8% M/M), narrowing the trade surplus and adding to evidence that Europe’s biggest economy started the fourth quarter on a weak footing.
  • UK manufacturers extended their winning streak in October as foreign demand sent car production to a record. Factory output rose 0.1% from September, marking six consecutive increases for the first time since modern records began in 1997. Overall industrial production was unchanged as warmer weather reduced demand for energy.
  • Italy’s anti-establishment 5-Star Movement supports the EU and wants significant law-making powers transferred from governments to the European Parliament, its leader Luigi Di Maio told Reuters. 5-Star, which leads opinion polls ahead of an election to be held by May, is trying to reassure Italy’s partners and financial markets that it can be trusted in government, and distance itself from its previously eurosceptic positions.

Rates

U-turn on disappointing wage inflation

Global core bonds trading showed two faces. They traded with a downward bias going into the US payrolls report on the back of positive risk sentiment. The US government averted an imminent shutdown, but the deal only postpones the problem by two weeks (Dec 22 new deadline). US President Trumps was rumoured to be readying phase two in its fiscal stimulus plan, infrastructure spending, by January. PM May and EC Juncker sounded confident on the completion of part 1 of Brexit-talks even if the agreement lacked details. Nevertheless, political developments weighed on core bonds. Trading made a U-turn after the payrolls report. Net job creation remained strong and the unemployment rate is still at the lowest level since 2000. However, earnings disappointed. The market reaction proves sensitivity to price/inflation data. The US Note future gradually gained momentum and trades currently around the intraday highs. The scale of the move remains limited though with next week’s Fed meeting looming. Investors don’t want to be wrongfooted by a Fed who still intends to hike rates three times next year.

At the time of writing, the German yields curve shifts 0.6 bps to 0.9 bps higher. The German 10-yr yield remains dangerously close to the 0.3% support level. The US yield curve steepens with yield changes ranging between -1.4 bps (2-yr) and +0.7 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are unchanged with the periphery outperforming (-3 bps to -5 bps) and a stellar performance from Greece (-33 bps). Greek bonds continue to profit from last week’s debt swap.

Currencies

Poor wage growth caps further USD gains

A positive risk sentiment kept the dollar near recent highs against the euro and the yen this morning as markets counted down to the US payrolls. US job growth remained strong, but wage growth again missed expectations. With markets currently giving more weight to prices rather than activity data, the dollar even declined off the intraday peak after the payrolls. EUR/USD trades in the 1.1760 area. USD/JPY is changing hands around 113.30.

Asian equities extended yesterday’s comeback overnight with Japan taking the lead. Regional data (Japan Q3 GDP and Chinese trade data) were supportive for equities and so was the prospect of a EU/UK Brexit agreement and the US Congress avoiding a government shutdown. The overall positive sentiment via higher core yields supported the dollar. USD/JPY extended gains north of 113. EUR/USD drifted to the mid 1.17 area.

There were plenty of headlines on Brexit and US politics (Agreement to extend government funding till 22 Dec; Trump proposals on infrastructure investment) this morning. The reaction of global markets was quite similar to what often happened late. European equities succeeded quite an impressive risk rebound, but with little spill-overs to other markets, including interest rate and FX markets. The dollar held near the recent highs against the yen and the euro, but the rally ran into resistance, awaiting the US payrolls.

The payrolls brought again a diffuse picture. Job growth (228k) beat consensus by a substantial margin. The jobless rate remained at the lowest level since 2000, but wage growth disappointed 0.2% M/M and 2.5% Y/Y; 0.3% M/M and 2.7% Y/Y was expected). As markets are quite sensitive to price data these days, US yields and the dollar even declined slightly. USD/JPY trades in the 113.30 area. EUR/USD rebounds to the 1.1765 area, off the intraday low around 1.1730. The dollar showed quite constructive price action this week, but this mixed payrolls report probably hampers further US gains ahead of Wednesday’s Fed policy decision.

Sterling rally stalls despite first ‘Brexit agreement’

Sterling rallied yesterday evening and this morning on headlines that the EU and the UK agreed to move to the second stage of the Brexit negotiations. The agreement was officially announced at a press conference with EU commission head Juncker and UK PM early this morning. Sterling touched a ST top during (cable) or soon after (GBP/EUR) the press conference. Cable filled offers in the 1.3520 area. EUR/GBP almost exactly tested the 0.8593 62% retracement support. The negotiations proceeding to a next stage for sure is good news for the UK. However, markets soon realized that the hard work still has to be done, even on the details of the separation. The sterling rally ran into resistance and the UK currency gradually returned some of the overnight gain, especially against the dollar. UK production data were as expected. The trade deficit was smaller than expected. However, the data were not the focus of markets. EUR/GBP trades currently in the 0.8750/60 area. Cable dropped to the 1.34 area, but regained a few ticks on USD softness after the payrolls (currently 1.3425).

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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