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Solid July job gains of 209,000 and a steady rise in wages indicate continued economic growth and consumer spending. Beyond the cycle, structural unemployment issues remain.

July Jobs Up 209,000: Consistent with Economic Growth

Nonfarm payrolls rose a solid 209,000 in July, with the three month average at 195,000 jobs. Job gains are consistent with 2 percent plus economic growth, steady consumer spending and Fed policy as currently projected for a December rate hike.

Hiring in the services sector remained solid, with gains in business services, education & health, finance and leisure & hospitality (top graph). Federal government jobs have risen 11,000 on average over the past three months. In the goods sector, manufacturing employment posted a strong gain over the past two months, while hiring in construction was up a modest 9,000 jobs on average over the past three months.

Wage Growth: Where Do We Go from Here?

Persistent gains in jobs continue to outpace the growth in the labor force, thereby putting downward pressure on the unemployment rate and modest upward pressure on wages.

Average hourly earnings rose 0.3 percent in July, an increase from the 0.2 percent pace the previous month. The year-ago pace of wage growth remained at 2.5 percent, the fourth consecutive month at this rate. While job growth remains strong, earnings continue to struggle to break out of this mid-two percent pace. The softer inflation readings and weak productivity numbers have limited the gains in nominal wage growth. On balance, average hourly and weekly earnings continue to improve and, along with more jobs, support the case for household income gains.

Over the longer run, wages reflect the economic fundamentals of the labor market, and those fundamentals include productivity and inflation (middle chart). During the current cycle, low productivity has been a theme that has helped explain lackluster wage growth. Moreover, inflation has been persistently below the FOMC's target of two percent. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.

Structural Problems Persist: Drag on Growth

Labor force growth has picked up over the last year and is a healthy sign for continued economic growth with limits on the rise in average hourly earnings. Yet, the current pace of labor force growth is not enough, without additional productivity gains, to kick up economic growth into the 3 percent range. Meanwhile, the labor force participation rate has remained fairly stable. In an odd turn of events, labor force participation in July is higher for less-than-high school and high school workers but down for some college and bachelor's degree workers. Perhaps less-educated workers are being enticed into the labor force while more educated workers are less involved as gains in income and wealth have allowed a change in lifestyle.

EUR/USD - 1.1745

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.1809

Kijun-Sen level                  : 1.1811

Ichimoku cloud top             : 1.1858

Ichimoku cloud bottom      : 1.1848

Original strategy  :

Sold at 1.1880, met target at 1.1780

Position : - Short at 1.1880

Target :  - 1.1780

Stop : -

New strategy  :

Sell at 1.1810, Target: 1.1710, Stop: 1.1845

Position : -

Target :  -

Stop : -

As euro’s intra-day decline has accelerated and broke below support at 1.0785, adding credence to our view that top has been formed at 1.1910 earlier this week and bearishness remains for the fall from there to bring retracement of recent upmove, hence further weakness to 1.1723-25 (previous support and 61.8% Fibonacci retracement of 1.1613-1.1910), then 1.1700, however, reckon support at 1.1650 would hold. 

As we have taken profit on our short position entered at 1.1880, we are looking to reinstate short on recovery as 1.1800-10 should limit upside. Above previous support at 1.1830 would defer and risk a stronger rebound to 1.1850-55 but price should falter below 1.1890-95, bring another decline later. 

USD/JPY - 110.96

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 110.52

Kijun-Sen level                  : 110.45

Ichimoku cloud top             : 110.56

Ichimoku cloud bottom      : 110.45

Original strategy  :

Buy at 110.40, Target: 111.40, Stop: 110.05

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 110.50, Target: 111.50, Stop: 110.15

Position :  -

Target :  -

Stop : -

As the greenback has staged a strong rebound in NY morning, suggesting a temporary low has been formed at 109.85 and upside bias is seen for test of 111.29-30 (previous resistance and 61.8% Fibonacci retracement of 112.20-109.85), however, break there is needed to add credence to this view, bring retracement of recent decline top 111.50 but price should falter below another previous resistance at 111.71, bring retreat later.

In view of this, we are looking to buy dollar on dips as 110.40-50 should limit downside and bring another rise later. Below 110.15-20 would defer but only break of 110.00 would signal the rebound from 109.85 has ended, bring retest of this level, below there would extend recent decline to 109.70 and later towards 109.50.

Cable commenced the second steep bear-leg in extension of pullback from Thursday's fresh multi-month high at 1.3268. The pair was hit by BoE on Thursday and came under renewed pressure after Friday's US jobs report, which showed very solid figures and boosted the dollar. Cable cracked next strong support at 1.3060 (Fibo 61.8% of 1.2932/1.3268 upleg) reinforced by rising 20SMA (currently at 1.3046), break of which would signal reversal and easily accelerate towards psychological 1.3000 support. Strong pullback has weakened the structure of near-term studies and increased risk of further easing, as reversed daily indicators show more room at the downside. Strength of current pullback would be measured by impact of today's US jobs data after markets fully digest them, as more optimistic outlook for the Fed after data would further inflate the greenback and increase pressure on British pound, which is on track for bearish weekly close.

Res: 1.3112; 1.3133; 1.3164; 1.3190
Sup: 1.3046; 1.3000; 1.2985; 1.2953

EUR/GBP - 0.9025

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

 
Although the single currency has maintained a firm undertone after this week’s anticipated resumption of upmove and mild upside bias remains for recent rise to extend gain to 0.9060-70 but reckon upside would be limited to 0.9085-90 due to overbought condition and price should falter below 0.9100-10 today, risk from there has increased for a retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside in the meantime. On the downside, whilst pullback to 0.8990-95 and 0.8850-60 cannot be ruled out, reckon support at 0.8922 would contain weakness and bring another rise later. Only below support at 0.8922 would signal a temporary top is in place, bring retracement of recent upmove to 0.8890-00 first. 

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.2627

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway with wave iii ended at 1.4690, wave v of C may bring one more marginal rise probably in 2018

Trend:  Down

 
Original strategy       :

Sell at 1.2690, Target: 1.2490, Stop: 1.2750

Position: -

Target:  -

Stop: -

 
New strategy             :

Sell at 1.2770, Target: 1.2570, Stop: 1.2830

Position: -

Target:  -

Stop:-

As the greenback has risen again after brief pullback, suggesting wave iii has possibly ended at 1.2414 earlier and consolidation with upside bias is seen for wave iv correction to 1.2670-80, then 1.2700, however, reckon upside would be limited to 1.2771 (previous resistance as well as 38.2% Fibonacci retracement of wave iii) and bring retreat later, below 1.2540-50 would suggest the rebound from 1.2414 has ended instead, bring further fall to 1.2490-00 but reckon support at 1.2451 would hold on first testing. We are keeping our count that wave v as well as wave (C) ended at 1.3794 and impulsive wave (i ii, i ii) is now unfolding with minor wave iii possibly ended at 1.2414, hence wave iv correction is underway.

In view of this, would be prudent to stand aside for now and look to sell on further subsequent rebound as 1.2771 resistance should limit upside. Above 1.2800-10 would defer and risk a stronger correction to 1.2850, however, still reckon upside would be limited to 1.2880-85 (50% Fibonacci retracement of wave iii) and bring retreat later next week.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

Solid US jobs data with better than expected July NFP numbers and upward revision to the previous month, as well as average earnings coming along with expectations, inflated US dollar. The single currency fell to the session low at 1.1825 against greenback, with fresh weakness increasing downside risk, after bulls were repeatedly rejected at 1.1900 zone. The notion is supported by extended daily studies for EURUSD pair, as slow stochastic has already emerged from overbought territory and overbought RSI is turning lower. All these are seen as negative signal for corrective action, however, markets need first to fully digest today's numbers and translate them into inflation, in order to get clearer picture of how will today's labor sector numbers affect Fed in its plans for starting tightening monetary policy. Today's close in red and below broken former bull-channel upper boundary (currently at 1.1827) is needed for stronger bearish signal. Next strong support lies at 1.1765 (rising 10SMA), guarding pivotal support at 1.1631 (rising 20SMA), break of which would signal stronger correction. However, overall picture remains firmly bullish (the pair is on track for the fourth consecutive strong bullish weekly close) suggesting that pullback could be seen as a breather before final push towards 1.2000 target.

Res: 1.1889; 1.1910; 1.1950; 1.1975
Sup: 1.1825; 1.1765; 1.1681; 1.1631

Those hoping that the USD would be thrown a lifeline may be in luck, following the news that the United States added another 209,000 jobs to its economy in July. This is an overall positive employment report and highlights the underlying strength of the US labor market. Figures exceeded expectations, with earlier projections sitting at 183,000 and wage growth, with average earnings rising by an annualized 2.5%, being further good news for the US Dollar.

I would expect the Dollar to receive a bid following this employment report and with this in mind, it provides a subtle reminder to investors, that the USD is oversold on an economic basis.

If the Dollar does not encounter a significant round of purchasing following this number, it may be due to investors "selling the news" that the current stance from the Federal Reserve is an uncertain one. Despite the fact that the Federal Reserve has indicated that raising US interest rates is a priority, no one can ascertain if the unwinding of its balance sheet has taken precedence.

Another factor to consider is whether ongoing political uncertainty and reduced confidence in the ability of Donald Trump to implement his promised legislative reforms, have made investors hesitant about purchasing the Dollar.

Highlights:

• Employment growth met expectations with an 11k gain July following an impressive 100k increase over the previous two months.
• July's increase entirely reflected higher full-time employment while part-time jobs fell. Of the 388k jobs added over the last year, more than 90% have been full-time positions.
• Manufacturing jobs rose 14k with employment in the industry now up 3% from a year ago, the best pace since 2012. Gains in the service sector were led by wholesale and retail employment
• Ontario led the provinces with employment up 26k in July.
• The unemployment rate fell 0.2 percentage points to a cycle-low of 6.3%. Broader measure of unemployment that include discouraged workers also declined.
• Wage growth remained weak but edged up to 1.2% from 1.0% in the previous month. Wage measures from other surveys are showing year-over-year growth above 2%.

Canadian employment rose consistently over the first half of the year and last month was no different with 11k jobs added in July. The average monthly increase of 28k year-to-date is well above the pace needed to absorb new entrants into the labour force, pushing the unemployment rate down to 6.3% in July from 6.9% at the end of last year. Strong job gains are consistent with above-trend growth in the economy. We are monitoring a 3.7% increase in Q2 GDP, which would match the previous quarter's gain and make Canada the growth leader among its G7 peers. And low unemployment at the national level supports the Bank of Canada's expectation that slack in the economy will be absorbed later this year. That should keep the central bank in tightening mode. We expect they will follow up on July's rate increase with another hike in October. Inflation developments will be important in dictating the pace of rate increases thereafter. Today's employment report showed that wage growth remains subdued despite tight labour market conditions. Lack of inflationary pressure will likely prevent the BoC from acting aggressively to remove accommodation.

Highlights:

• Payroll employment rose 209k in July. That was above an expected increase of 180k and built further onto June's solid 231k gain.
• The increase in July payrolls was less reliant on government employment which rose only 4k after the 37k surge in June which resulted in private employment strengthening to 205k from June's rise of 194k.
• The household survey indicated an even greater employment gain of 345k which contributed to the unemployment rate dropping to 4.3% from 4.4% in June.
• The annual increase in average hourly earnings remained unchanged at June's rate of 2.5%.

The robust 209k increase in July payrolls is indicative of firms experiencing sufficiently strong demand to remain confident about taking on new workers. This in turn is helping to send the unemployment rate lower to 4.3% in July. Tightening labour markets had been putting upward pressure on wage inflation through 2015 and 2016. However, data so far this year, including today's data for July, show wage gains flattening out at around 2 1/2% which matches the 2016 increase and compares to increases of 2.3% and 2.1% in 2015 and 2014, respectively. Confirmation that labour markets are approaching full employment is expected to warrant the Fed continuing to withdraw current stimulative monetary conditions. Though tightening labour markets will eventually return wage inflation to an upward trend, in the interim, the absence of wage pressure will keep the pace of tightening gradual. Our forecast assumes one further 25 basis point hike in fed funds this year with similar hikes in each of the four quarters of 2018. This modest rise in official rates is expected to be paired with the Fed starting to gradually shrink its balance sheet starting in October.