Mixed jobs report failed to set new trend
On Friday, the US jobs report showed that the pace of job creation bounced back in June and addressed investors’ concerns after a worrying slump in May. The US economy added 222k nonfarm jobs in June compared to an upwardly revised figure of 152k in the previous month. However, the lack of consistent wage pressure scaled down the market’s optimism. Average hourly earnings grew 2.5%y/y in June (versus 2.6% expected) compared to a downwardly revised number of 2.4% in May.
June’s inflation figures are due for released on Friday and according to the latest survey, headline inflation is expected to have eased to 1.7%y/y from 1.9% in the previous month amid falling energy prices. The core measure is expected to remain stable at 1.7%.
After printing at 0.5%y/y in May, real average weekly earnings will also be released on Friday. The indicator started the year in negative territory, contracting 0.6% and 0.5% in January and February, respectively, before bouncing back to 0.6% in April, highlighting the Fed’s sensitive work. Indeed, the solid pace of hiring failed to translate into higher nominal wage for Americans, while looking at the adjusted measure for inflation, the picture is even darker as since last August real wage growth have been slowing down significantly. We suspect the Fed wants to see a solid recovery in real wage before accelerating the pace of tightening. This is indeed the guarantee of a solid job market that could stand tighter monetary conditions.
The greenback was little changed after Friday’s jobs report. The dollar rose 0.22% against the Japanese yen and 0.12% against the Canadian dollar. Investors were looking for a new driver. They will have to wait another round as the report didn’t allow to reduce the level of uncertainty.
Yen set to weaken on continued Fed normalization path
That is a good news for the Bank of Japan, investors are estimating the likelihood of another US rate hike much higher which is driving the yen currency lower. The US ZIRP (zero-interest rate policy) seems to approach to an end. The rate differential between the US yields should then increase.
The spread between US 10-Y and Japan 10-Y is now widening. The US is now whistling the end of the free money era and Japan which has been struggling to fight against deflation may now have a unique occasion to see its inflation running back again.
For the time being, Japan fundamentals data are still on the soft side. This morning May machine orders declined by 3.6% m/m after the fall of 3.1% in April. The USDJPY is now monitoring its highest level in a year and we believe that in the absence of geopolitical uncertainties, the JPY should further weaken. The summer promises to be quiet for the BoJ.
