U.S. Review

Data Supports Cautiously Optimistic Fed View

• The Federal Reserve held rates steady this week, as widely expected. It reiterated the strengthening U.S. domestic outlook would warrant gradual policy tightening over the medium term. No clues were given on the timing of the next move, likely because uncertainty surrounds the unfolding of the new administration's policy, and the Fed can afford to wait for clarity because inflation remains tame.
• The economic calendar was packed with more positive reads on the U.S. economy, capped off with the 227,000 jobs added in January - a fairly solid start to what is shaping up to be an interesting year.

No Urgency in Data, Fed Has Space to See Policy Unfold

FOMC members see a strengthening U.S. economy that warrants a gradual return to normal monetary policy. The trick now is timing interest rate moves without derailing said strength. After checking the box on the full employment objective, guiding inflation to 2 percent requires a bit more finesse. Tight labor markets fuel inflation and monetary policy tools operate on a lag; therefore, the data-dependent Fed follows data-heavy weeks, like this one, closely for hints that inflation is moving ahead of target. Major indicators out this week - January jobs data, ISM surveys, consumer confidence and income & spending, to name a few - gave an upbeat assessment of the current economy and expected conditions going forward. Inflation indicators showed mild price pressure - enough to assure the Fed that inflation is firming but not flaring. Lack of urgency in the economic data thus far affords the FOMC some time to wait for clarity on the new administration's policy actions and their economic implications.

Personal income and spending in December was solid, up 0.3 percent and 0.5 percent, respectively. Following two months of soft readings, personal consumption expenditures ended the year on better footing. Real personal spending was up a more muted 0.3 percent in December, as inflation cut into purchasing power. Still, Americans spent a larger share of income, lowering the savings rate to 5.4 percent from 5.6 percent in November - providing some hard data to corroborate optimism in the various consumer sentiment surveys since the election. Conference Board Consumer Confidence's measure of expectations surged postelection but retraced in January, though consumers' assessment of the present economic situation improved. Like the FOMC, consumers' confidence in sustaining a strong economic outlook hinges on how the new administration's policy unfolds.

Sentiment among manufacturers continues to improve, according to the ISM survey. The closely-watched indicator rose for the fifth consecutive month, to 56.0 in January, as broad-based gains across indices pointed to steady optimism among respondents. The employment component stood out most in the upbeat report, rising 3.3 points to 56.1. Pressure from soft global growth and the energy-related investment downturn has largely faded, though manufacturers still have to face headwinds from the stronger greenback weighing on exports. Inflationary pressures were also apparent in the report, with the prices paid component rising in 15 manufacturing industries, while none reported paying lower prices for inputs. This also assures the Fed inflation is on course to meet its target, as core goods deflation has weighed on overall inflation in recent years.

January's jobs report surprised to the upside as employers added 227,000 jobs on the month, much stronger than the consensus estimate. The job market also pulled more Americans in from the sidelines; as the labor force participation rate rose 0.2 percentage points to 62.9 percent, giving the slight uptick in unemployment to 4.8 percent some positive light. Average hourly wage growth was softer than expected, particularly if the labor market is at full employment; this bears watching for the next few months. We still expect inflation to move to the two percent target this year, prompting two rate hikes, with the first move in June.

U.S. Outlook

Trade Balance • Tuesday

The international trade balance for the final month of 2016 likely remained more or less steady relative to the November trade deficit. Net exports exerted a sizable 1.7 percentage point drag on real GDP growth in Q4 as a whole, largely as a result of some payback due to the quirky surge in soybean exports that boosted growth in Q3. Despite quarterly volatility, net exports subtracted just 0.1 percentage points from real GDP growth in full-year 2016. Smoothing through the volatility, export growth has begun to stabilize after weakening early in 2016.

Should the data come in as expected, the full-year 2016 U.S. trade deficit would be approximately $500 billion. Despite the recent pickup in export growth, we expect the real trade deficit to widen a bit in 2017 as the dollar appreciates further, global growth remains tepid and healthy domestic demand continues to pull in imports.

Previous: -$45.2B Wells Fargo: -$44.6B Consensus: -$45.0B

Import Price Index • Friday

Import prices increased 0.4 percent in December, boosted by a 7.9 percent surge in imported petroleum prices following OPEC's agreement early in the month. However, dollar strength has continued to keep non-energy import prices under pressure; exfuels, import prices have fallen in three consecutive months and have not increased since last July.

We expect import prices to rise another 0.4 percent in January. If realized, this would bring the year-ago change to 3.5 percent, nearly double December's multiyear high and the fastest pace of total import inflation since March 2012. Base effects from the steep decline in oil prices are providing a boost to import price inflation. Despite the dollar recently giving back some of its post-election gains, renewed dollar strength as the Fed moves forward with normalization will likely counteract some of the inflationary effects of higher energy prices in this space.

Previous: 0.4% Wells Fargo: 0.4% Consensus: 0.4% (Month-over-Month)

Monthly Budget Statement • Friday

The fiscal stimulus debates sparked by the election have brought federal revenue and spending trends to the forefront for markets. The Monthly Treasury Statement offers a snapshot of these trends. For most of the recovery, revenue growth outpaced spending growth as the result of an improving economy and policy changes. More recent, however, spending growth has returned to a steady pace, while revenues have decelerated dramatically.

Multiple factors have led to the anemic pace of tax collections, including weak corporate profits, slowing employment growth and smaller capital gains realizations. On balance, our expectation for faster economic growth in 2017 should fuel higher tax collections, but a robust turnaround seems unlikely at this point in the cycle. As policymakers weigh changes to the tax code, the recent federal revenue slowdown will do them few favors as they strive to maintain deficit-neutrality.

Previous: -$27.5B Consensus: $33.0B

Global Review

Global Economy Getting on Firmer Footing

• Real GDP in the Eurozone grew at an annualized rate of 2.0 percent in Q4, stronger than most analysts had expected. In the United Kingdom, the Bank of England revised up its forecasted growth rate to 2.0 percent from 1.4 percent for 2017, but does not seem to be in a great hurry to tighten rates.
• Real GDP in Canada rose more than expected in November, although it is difficult to make a convincing case that the Canadian economy is "booming" at present. Real GDP in Mexico rose 2.2 percent on a year-ago basis in Q4. We remain concerned about the outlook for the Mexican economy going forward.

Global Economy Getting on Firmer Footing

Real GDP data released this week showed that economic growth in some of America's major trading partners was reasonably solid in Q4-2016. If, as we expect, economic growth in the rest of the world firms further in coming quarters, then the outlook for U.S. exports should brighten somewhat, everything else equal.

Real GDP in the Eurozone grew at an annualized rate of 2.0 percent in the fourth quarter, a tad stronger than the 1.8 percent growth rate that was registered in Q3 (see chart on front page). A breakdown of the GDP data into its underlying demand components will not be available for another month, but it appears that growth in Q4 was driven primarily by domestic demand. If so, then the expansion in the Eurozone is becoming more and more self-sustaining. Although the ECB is probably not quite ready to dial back its QE program, it could begin to do so later this year. (See Is ECB Policy Tightening Coming Into View, which is posted on our website.)

We reported in this space last week that real GDP in the United Kingdom grew at an annualized rate of 2.4 percent in Q4 (top chart), which was stronger than the rate that most analysts had expected. This week, the Bank of England released its quarterly Inflation Report in which it revised its own GDP forecast for 2017 up to 2.0 percent from 1.4 percent. Interestingly though, the Monetary Policy Committee (MPC) does not seem to be in a huge hurry to raise rates. Not only did all nine MPC members vote at the Feb. 2 meeting to keep policy on hold, but the MPC indicated in the statement after the meeting that it could tolerate a temporary overshoot of CPI inflation above its 2 percent target. (See U.K. Q4 GDP Growth: BoE Policy Implication for our most recent thoughts on British interest rates going forward.)

Moving on to North America, real GDP in Canada rose 0.4 percent in November relative to the previous month (middle chart). Not only was the outturn stronger than most analysts had expected, but it more than reversed the 0.2 percent decline in output that occurred in October. It appears that the Canadian economy has accelerated again following the marked slowdown that accompanied the collapse in energy prices that commenced in 2014. That said, it is difficult to make a convincing case that the Canadian economy is "booming" at present with a year-over-year growth rate of only 1.7 percent. Consequently, we look for the Bank of Canada to remain on hold throughout most of 2017.

South of the border, real GDP in Mexico rose 2.2 percent on a year-ago basis in Q4, a slight uptick from the 2.0 percent rate that was registered in Q3 (bottom chart). As we wrote earlier this week, however, growth in the Mexican manufacturing sector remains lackluster. (See Mexican Economic Growth Slows a Bit in Q4-2016.) Moreover, we remain concerned about the outlook for the Mexican economy going forward. As we noted last week, the central bank has hiked rates by 275 bps since December 2015 in an effort to counter some of the sharp downward pressure on the currency. Indeed, we forecast that the combination of rising interest rates and uncertainty related to NAFTA will lead to a mild recession in the Mexican economy this year.

Global Outlook

U.K. Industrial Production • Friday

British industrial production (IP) grew by a stronger-than-expected 2.1 percent on the month in November. Oil and gas production surged as the Buzzard oil fields came back on line after an extended shutdown - one of the U.K.'s largest oil fields. Year over year, overall IP was up 2.0 percent, compared to the 0.9 percent decline in October. In addition, manufacturing production saw a 1.3 percent increase on the month helped by a large upswing in the pharmaceutical sector. On a year-ago basis, the manufacturing sector grew by 1.2 percent. For December, the consensus expects slower growth for industrial and manufacturing production as warmer weather more than likely hampered output in the energy sector.

Meanwhile, next week we will also get data on the U.K.'s December's trade balance, which widened in November as the increase in exports was not enough to offset the jump in imports.

Previous: 2.0% Consensus: 2.9% (Year-over-Year)

Mexico Industrial Production • Friday

Mexican industrial production (IP) was unchanged in November from a month prior as a slump in mining nearly offset strong gains in manufacturing production. However, the year-over-year results showed an improvement of 1.3 percent, compared to the 1.2 percent decline in October. Preliminary fourth-quarter economic data showed that the industrial sector posted a flat rate, underscoring the difficult times the sector is facing, even as the Trump administration has not started the process of attempting to renegotiate NAFTA. The manufacturing sector, which grew 4.3 percent in November 2016 compared to the previous year, could be negatively impacted depending on the outcome of the negotiations.

Other data slated for release next week include consumer price inflation and vehicle production.

Previous: 1.3%

Canada Jobs Report • Friday

Canada's jobs report is quite volatile month to month as shown in the graph on the right. In December, Canada employment bested expectations of a slight loss of jobs, adding 53,700 jobs, and ended the year up 214,000 jobs - the largest increase since 2012. December's report came on the tails of a 10,700 increase in November and marked five months of consecutive growth. That said, the economy actually added 81,000 full-time positions in December, offset by a loss of 27,000 part-time positions. By sector, jobs were added in both the service-producing (+52,000) and goods-producing sector (+1,700), which includes manufacturing. Meanwhile, Canada's unemployment rate ticked up to 6.9 percent, as more people entered into the workforce. Markets do not expect for this momentum to have carried into the new year and looks for the economy to have shed 10,000 jobs in January.

Previous: 53,700 Consensus: -10,000

Point of View

Interest Rate Watch

Anticipating Fed Expectations

"Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective." – FOMC statement from the February meeting.

But not for long - our forecast for the PCE deflator calls for 1.9 percent in the current quarter and then 2.0 percent by Q3. This would signal a continued negative real fed funds rate (top graph). The rise in inflation is consistent with stabilizing oil prices that should no longer prevent inflation from hitting the 2 percent target by mid-2017. Meanwhile, on the labor market side of the mandate, the unemployment rate has fallen from 6.2 percent in 2014 to 4.8 percent currently. We expect two moves in 2017 - the first in June and a second dependent on the market and FOMC's perception of the impact of the administration's economic initiatives.

Market Moving Ahead of FOMC

In contrast to the FOMC's characterization of inflation expectations, the Fed's five-year five year forward measure of inflation expectations has shifted upward noticeably post-election. This is reflected in the market's reaction as illustrated in the middle figure. However, if the FOMC's neutral fed funds rate is indeed 3.0 percent, as they estimate, this would suggest the two-year Treasury yield has a long way to go - upward.

Global Economic Improvement and the Fed's Balance Sheet

Our outlook is for an improvement in global growth in 2017 relative to 2016 with increased reflation in several U.S. trading partners. Global and U.S. reflation will put pressure on the FOMC to begin a rebalancing of its balance sheet (bottom graph) which we believe would be possible by mid-2018. Fed guidance is imprecise as phasing-out reinvestment is timed to occur "once normalization of the fed funds rate is well under way." Of course, this imprecision is to be expected, given the uncertainties of economic and political developments over the next two years. Normalization would likely feed into the fiscal policy debate as the interest rate burden of the federal debt would increase with a balance sheet reduction.

Credit Market Insights

The Return of Homeowner Equity

U.S. home prices have rebounded meaningfully since the Great Recession. According to data from S&P CoreLogic Case-Shiller, national home prices have risen nearly 40 percent from their 2012 trough. While the persistent increase in home prices has created affordability challenges in many markets around the country, homeowners have largely benefitted from rising home values.

Fueled by home price appreciation and the pay down of principal, homeowner equity - the difference between the value of one's home and the amount of mortgage debt on the home - has climbed higher. After hitting a trough in Q2 2011, home equity wealth has risen by more than 50 percent, increasing from $6.1 trillion to $13.0 trillion in Q3 2016. Negative homeowner equity - those that owe more on their home than it is worth - has also shown cyclical improvement. Just 6.3 percent of homeowners with a mortgage have negative equity, which is down from 26 percent in 2010, according to CoreLogic estimates.

The rise in home equity wealth corresponds with other barometers of consumer finances, including delinquency rates and income growth, which point to strengthening household balance sheets. Moreover, the rebuilding of this component of household wealth has been supportive for consumer spending. We expect national home prices to rise another 4 percent in 2017, supporting additional gains in equity.

Topic of the Week

NAFTA Rules of Origin: What Is at Stake?

At a time when supply chains extend across country boundaries all over the world, NAFTA's rules of origin become even more important to determine the source of exported and imported goods. The rules of origin are used to determine if products produced in a member country of NAFTA, using imported inputs, are considered to have been produced in that country for taxing purposes. That is, it determines if the product has enough NAFTA country content to not pay duties or taxes imposed on imports. For example, an automobile produced in North America is considered exempt of duties if 62.5 percent of the automobile originates in North America. The Trump administration could negotiate an increase of that percentage to encourage greater production of automobiles in the United States versus automobiles produced in Europe or Asia.

This is important, because, in the past, companies have tried to bypass free trade agreement rules by originating production in member countries of NAFTA by locating a single part of the production process in the United States, Canada or Mexico. However, this part of the production process is so minimal it is clear that the firms organized such production to benefit from the lower taxes. An example that comes to mind is a producer of orange concentrate from outside the NAFTA region that opens a plant in one of the NAFTA member countries just to add water to the concentrate and sell it as orange juice produced in NAFTA, thus avoiding taxes on trade.

Rules of origin exist for all production taking place in the United States, Canada and Mexico and determine if a product is indeed produced by one of the members of the trade agreement for purposes of taxes/duties. Changing the rules of origin could benefit U.S. producers and generate more jobs in certain industries, like the automobile industry, something that could address the issues brought about by the Trump administration.

HIGHLIGHTS OF THE WEEK

United States

• Political events and communiqués from the new administration, continued to dominate the headlines - taking some of the attention away from what was a week of upbeat economic data.
• The FOMC held rates steady this week, but remained upbeat about the economy - pointing to continued improvement in the labor market. This narrative was corroborated by this morning's employment report, which blew expectations of 180K out of the water as payrolls rose by 227K.
• In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves under heightened policy uncertainty. If the economic expansion continues at the current moderate but above trend pace of growth, we expect the Fed to hike around the mid-year mark. By that point some of the missing pieces from the policy puzzle should have fallen into place.

Canada

• According to Canada's leading rodent forecaster, we are in for an early spring. And while Canada's economy is not out of the shadows yet, data out this past week showed that it did spring back into action in November.
• Real GDP rose 0.4% in November, led by a rebound in the goods sector. Canada's economy picked up momentum in the second half of the year, as the good sector has improved against a back drop of consistent growth in services.
• In a speech, Bank of Canada Governor Poloz expressed concerns about both the move up in Canadian bond yields and the level of the loonie. This underscored the dovish stance of the Bank, given the risks to growth are primarily to the downside. A significant shock, or series of smaller shocks could see the Bank cut again.

UNITED STATES - UPBEAT ECONOMIC DATA CORROBORATES FED NARRTIVE

Political events and communiqués from the new administration, whether formal or informal, continued to dominate the headlines this week - taking some of the attention away from the upbeat economic data. Equity markets eased off slightly from last week's all-time high, while long-term treasury yields are expected to end the week roughly unchanged. The euphoric post-election momentum appears to have finally plateaued as both equity and fixed income markets remain range-bound near recent highs.

The lack of policy detail in key areas such as tax reform, infrastructure spending and trade is likely to have featured in the FOMC's decision to hold the federal funds rate steady this week - a decision that surprised no one. The committee remained upbeat on the outlook, noting that the economy "continued to expand at a moderate pace", while making reference to solid job gains and an unemployment rate that remains "near its recent low".

This narrative was corroborated by January's employment report, which blew expectations of 180K out of the water as payrolls rose by 227K (Chart 1). Gains were fairly widespread in the private services sector, while on the goods-producing side they were concentrated in construction (+36K) - a highly seasonal sector and thus one where we could see some reversal in the months ahead. The unemployment rate ticked up slightly to 4.8%, but for a good reason, as the continued improvement in labor market conditions is drawing in more workers from the sidelines - evidenced by the 0.2 ppts move up in the participation rate on the month to 62.9%. While this development is welcome and largely anticipated, taken together with the deceleration in wage growth to 2.5% y/y from 2.8% in the month prior, it is likely to hearten Fed doves to argue for continued patience.

Earlier in the week, personal income and spending data for December was also positive, providing a solid handoff for consumer spending growth heading into 2017. Incomes rose 0.3% m/m and spending rose 0.5% m/m. Consumer spending drove growth in the fourth quarter and we expect this momentum to carry into the first quarter of 2017. Manufacturing activity remained solid, as the ISM index rose to the quickest pace of expansion in over two years in January. Comments by survey respondents were generally positive with little evidence that recent domestic and global events had taken a toll on demand. On the other hand, services sector activity held steady on the month with the index still at its highest level since September 2016 (Chart 2).

Overall, the US economy continues to exhibit signs of improvement. In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves under heightened policy uncertainty. If the economic expansion continues at the current moderate but above trend pace of growth, we expect the Fed to hike around the midyear mark. By that point some of the missing pieces from the policy puzzle should have fallen into place, such as infrastructure spending plans. Yet, it looks like the highlyanticipated tax reform bill will not be written until summer. That, coupled with the slow nature of the political process in general, has the potential to lead to some pullback in consumer, business, and market sentiment. In the meantime, markets will continue to hang on every word from the new administration.

CANADA - A GROUNDHOG AND A CENTRAL BANKER WALK INTO A BAR

We heard from two high-profile forecasters this week. A central banker reminded us that economic forecasts are only approximations, and that "models are not crystal balls". A couple of days later, a rodent suggested that we're in for an early-spring. While we will address Governor Poloz's remarks in a bit, the groundhog may be onto something with data released this week indicating that Canada's economy already had a spring in its step as far back as November.

Monthly real GDP rose by a healthy 0.4% in November, recovering from a 0.2% drop in October. After making little progress through 2015 and the first half of 2016, Canada's economy has picked up some momentum in the latter half of 2016 (see chart). The main factor behind the swing from September to November was related to improved fortunes in the goods-producing sector. The sector is growing just below 1% on a yearly basis, after spending much of the last two years in contraction.

In contrast, the services sector continues to chug along at a pace just shy of 2%. Beneath the surface, one industry that has been a key driver of services sector growth is showing distinct signs of cooling. Real estate rental and leasing expanded at a 2.2% year/year pace in November, a marked deceleration from the roughly 3.5% y/y clip at the beginning of 2016. This suggests that the multiple housing regulations that have been put into place alongside rising interest rates are slowing real estate activity.

The healthy GDP figures add to the evidence that the Canadian economy is shaking off some of the setbacks earlier in the year and growth in the fourth quarter of 2016 is likely to come in ahead of the Bank's expectations of 1.5%. Still, these facts are not likely to move the needle very much for the Bank of Canada, given the still significant amount of economic slack that remains. As such, the Bank of Canada will probably be happy to leave its policy interest rate at 0.50% well into the future, helping to support the ongoing absorption of the remaining slack.

In fact, in his remarks this week, the Bank of Canada Governor Poloz seemed to reinforce the risk of further monetary easing in Canada. He indicated the Bank's discomfort with both the run up in Canadian bond yields and the elevated level of the loonie. A rate cut would help on both of these fronts, but at this point we do not expect further easing will come to pass, given an outlook for continued absorption of the remaining economic slack. As Governor Poloz pointed out, however, the risks to the growth outlook remain tilted towards the downside with the threshold for action potentially breached either by a significant shock, or a series of small shocks.

Indeed, the Canadian dollar is the second best performing major currency since the U.S. election (see chart), seemingly at odds with the rising downside risk to Canada's economy stemming from a more protectionist stance by the Trump administration. The loonie has had a helping hand from firmer oil prices, but markets may be somewhat complacent about the potential impact from any thickening of the U.S. border.

Worker pay stagnated as US jobs beat expectations

The U.S. dollar had another difficult week as it depreciated against most major pairs. Central banks remained on the sidelines as the Bank of Japan (BOJ), U.S. Federal Reserve and Bank of England (BoE) all left their monetary policies unchanged awaiting further data. The Reserve Bank of Australia (RBA) is up next on Monday, February 6 at 10:30 pm EST. It is anticipated the RBA will not make any changes on its February meeting.

Brexit cleared another hurdle as the British Parliament approved the bill allowing the Prime Minister to trigger article 50. Up next is a debate in the Commons, before it is voted but the majority win in Parliament sends a strong signal as the exit from the E.U. could be triggered before the end of the month.

Trade has been a hot topic of late, which gives higher priority to global trade data to be released this week. Canadian and American trade balances will be published on Tuesday, February 7 at 8:30 am EST. Given the emphasis U.S. President Donald Trump has put on what is fair and not regarding American trade the release of the figures could spark another round of comments on the subject. China is also due to release its trade balance on Thursday, February 9.

The EUR/USD rose 0.812 percent in the week. The single currency is trading at 1.0790 after the release of the January U.S. non farm payrolls (NFP) report. The U.S. added 227,000 jobs way above the expected 175,000 but the tepid wage growth and its lack of inflationary pressure pushed back the need for the U.S. Federal Reserve to hike rates. The Fed had already delivered a noncommittal statement on Wednesday. A soft wage growth component and comments of a more gradual pace by Chicago Fed President and FOMC voting member Charles Evans on Friday depreciated the dollar.

The lack of focus from the Trump administration on pro-growth policies in favor of fulfilling some of his more divisive campaign promises have hurt the dollar. Friday afternoon's signing of an executive order to reform financial regulation boosted the Financial sector as a laxer regulatory environment is anticipated during Trump's presidency.

European data has improved boosting the EUR, the biggest surprise has been the negative results out of Germany but as a whole inflation in the European Union has improved with encouraging employment numbers.

Gold rose 2.537 percent in the last 5 days. The precious metal is trading at $1,218.94 after U.S. President Donald Trump's comments and diplomatic blunders made investors seek cover. The lack of a solid jobs report in the United States kept the yellow metal bid as it pushes back the monetary policy tightening timetable for the Fed. The strong number of jobs was not matched by growing wages, which has a higher inflationary pressure going forward. The more President Trump sticks with a combative agenda focused on trade and immigration and less on fiscal stimulus and infrastructure spending the higher the price of gold could go as investors sell the dollar.

Oil rose 1.898 percent in a weekly basis. The price of West Texas is $53.9 per barrel in a volatile week. Energy touched weekly lows of $51.70 and ended the week near highs of $53.82. The rise of U.S. inventories did little to offset higher prices resulting from the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement. Trump's comments about Iran sparked a rally in oil prices as the lifting of sanctions had increased global supply only to be curbed by the OPEC deal.

Oil prices are still under threat of an increase of U.S. shale production as there is no agreement to keep production at a certain level, unlike OPEC and non OPEC producers like Russia. U.S. crude inventories rose by 6.5 million barrels nearly doubling the weekly forecast.

The USD/MXN lost 2.502 percent this week. The peso is trading at 20.38 versus the dollar. The Mexican currency bounced back after the market is uncertain how much stock to put on Donald Trump's comments made on twitter. The innovative tactics used by the recently inaugurated President have kept peso traders on their toes. The emerging market currency had been a proxy for others going into the elections and rose in prominence and volatility after then candidate Donald Trump put the building of a Wall between Mexico and the United States as a key promise of his campaign. Compounding risk on the Mexican currency was also Trump's comments about NAFTA and his anti-trade agenda. The Mexican peso have been decoupled from economic fundamentals and were are the mercy of rhetoric, but as the market has made it clear it expects Trump to move forward on fiscal stimulus and infrastructure the dollar has depreciated.

The peso has been one of the strongest currencies since the end of January, but still remains 9 percent lower than on November 5 when Donald Trump was elected.

Market events to watch this week:

Monday, February 6

• 9:00pm NZD Inflation Expectations q/q
• 10:30pm AUD Cash Rate
• 10:30pm AUD RBA Rate Statement

Tuesday, February 7

• 8:30am CAD Trade Balance
• 8:30am USD Trade Balance
• 10:00am USD JOLTS Job Openings
• Tentative NZD GDT Price Index

Wednesday, February 8

• Tentative GBP EU Membership Vote
• 10:30am USD Crude Oil Inventories
• 3:00pm NZD Official Cash Rate
• 3:00pm NZD RBNZ Rate Statement
• 4:00pm NZD RBNZ Press Conference
• 7:10pm NZD RBNZ Gov Wheeler Speaks

Thursday, February 9

• 4:00am AUD RBA Gov Lowe Speaks
• 8:30am USD Unemployment Claims
• 7:30pm AUD RBA Monetary Policy Statement
• Tentative CNY Trade Balance

Friday, February 10

• 4:30am GBP Manufacturing Production m/m
• 8:30am CAD Employment Change
• 10:00am USD Prelim UoM Consumer Sentiment

*All times EST

Non-farm payrolls increased by 227k in January, or well above the 180k expected by the street. Revisions to the previous year indicated that 85k more jobs were added than previously reported, with large upward revisions to spring and summer hiring somewhat offset by downward revisions on the front and back end of the year.

Private payrolls rose by 237k, more than 60k above consensus. Private services hiring was led by retail (+46k), professional & business services (+39k), health care (+32k) and financial services (+32k). Construction (+36k) had a great month, with manufacturing (+5k) and mining (+4k) also adding to the goods sector tally. Government sector (-10k) shed jobs for the third consecutive month.

The unemployment rate ticked up by 0.1 percentage points to 4.8% as household employment pulled back despite some re-entry to the labor force. The influx of people back into the labor force has lifted the participation rate up by 0.2pp to 62.9% on the month - half a point above its low. Most broader measures of unemployment also rose on the increased labor force participation. The employment-ratio also rose by 0.2pp, matching its post-recession high.

Average hourly earnings rose by 0.1% during the month, disappointing expectations, with the year-over-year wage growth decelerating from 2.8% to 2.5% in January.

Average weekly hours were unchanged at 34.4.

Key Implications

This report looks like a blockbuster one on many fronts. Last year's job gains were revised up, with the economy adding the most jobs in four months during January. Moreover, the breadth of hiring strength across industries particularly encouraging as far as the U.S. economic momentum is concerned. Notably, retail trade hiring was the highest in a year while financial services had the best month of hiring since the peak of the housing bubble in October 2005.

The goods sector performance was also quite encouraging, with construction sector hiring picking up to near its fastest pace in a year despite anecdotal evidence of significant shortages of labor. The mining sector also continued to hire for the third month in a row after 25 months of declines, indicating that the sector is turning around. Manufacturing, whose strengthening remains the focus of the new administration's policies, also added jobs but employment in the sector still remains below last year's levels.

The jobless rates rose, but they did so for a good reason as continued strength in the labor market appears to be bringing in more people off the sidelines to look for work. This is a welcome development that economists and policymakers have been anticipating for some time and should provide further arguments for the Fed doves to resist a faster pace of rate hikes. These arguments will be further strengthened by the weak wage gain this month, however we anticipate that much of this is related to the mix of hiring - with temporary and retail jobs accounting for more than a quarter of the total hiring.

Ultimately, despite the strong headline we don't expect this report will nudge the Fed into a faster pace of wage hikes, with our baseline scenario anticipating two hikes this year, with the next one likely to come around the mid-year mark.

• The January employment gain reflected a sharp improvement relative to increases of 157K in December (156K previously) and 164K in November (204K previously). Market expectations had been for a more modest 175K gain in January.
• The more volatile household employment measure soared (on an adjusted basis) 457K though, with the labour force spiking higher by an even greater 584K, the unemployment rate unexpectedly rose to 4.8% from December's rate of 4.7%.

The overall increase reflected an impressive 45K jump in goods-producing employment following the 15K increase in December. This largely reflected construction employment soaring 36K after a 2K gain in December. Manufacturing employment rose a modest 5K which was down from an 11K gain the previous month. Employment among service-producing industries rose 192K after the 150K gain in December.

Though the payroll employment gain implied strength in labour markets this was tempered by the rise in the unemployment rate. However, this rise resulted from a surge in the labour force which could imply optimism about the rising prospect of finding work. Also tempering the impression of tightening labour markets was the minimal 0.1% rise in average hourly earnings that fell well short of the 0.3% gain expected going into the report. The modest monthly increase contributed to the year-over-year rate dropping to 2.5% from the 2.8% that was recorded in December. Annual wage increases have generally been trending higher in recent years rising 2.1%, 2.3% and 2.6% between 2014 and 2016.

Traders are undecided whether to throw the USD a lifeline following the news that the United States added a stunning 227,000 jobs to its economy during the first month of 2017.

While the number on headline is stunning and continues to outline the underlying strength of the US economy there are some initial concerns that wage growth underwhelmed, which has added fuel to the fire that the Federal Reserve will be keeping US interest rates unchanged over the next couple of months. Although the Federal Reserve is likely to continue highlighting their public bias for another three interest rate rises this year, this data is not convincing enough to suggest the central bank will be confident enough to pull the trigger before May at the earliest. The air of uncertainty over what clarity the Trump administration can provide when it comes to their fiscal stimulus plans is contributing towards the consensus that the Fed will wait and see how things develop.

If it wasn't for the underwhelming wage growth figures I do believe that the USD would be strengthening across the financial markets following this release, but the wage numbers do suggest that March is definitely off the table when it comes to a possible interest rate rise from the Federal Reserve. When you combine this with the uncertainty circulating over whether the Trump administration is going to implement their protectionist policies before pushing ahead with their stimulus promises which the financial markets purchased heavily into, you can understand why traders are behaving undecidedly to the NFP release.

Despite traders being unsure of how to react to the USD, it looks like the slump in the Sterling is going to continue for the second day with the Pound/Dollar concluding the week suffering two days of successive losses. The Services PMI that was released from the United Kingdom earlier during trading today suggested that economic momentum is slowing down, complimenting to the selling pressure seen in the Pound since yesterday. While the Bank of England (BoE) upgraded its growth forecast for 2017, the lack of conviction from Governor Carney over which direction UK interest rates could be heading next has reminded traders that the UK is still set to face ongoing uncertainty over the Brexit.

Basically the probability looks high that UK inflation will surpass the 2% threshold that could encourage the BoE to consider higher interest rates, but the prolonged uncertainty over what the impact to the UK economy will be once Article 50 is finally invoked is going to limit the scope of options for Carney to move either direction when it comes to interest rates.

Daily Pivots: (S1) 1.0731; (P) 1.0780 (R1) 1.0804; More.....

Intraday bias in EUR/USD remains neutral as it's staying in tight range below 1.0828 temporary top. Another rise cannot be ruled out yet. However, choppy rise from 1.0339 is viewed as a corrective move. Hence, we'd expect upside to be limited by 1.0872 resistance and bring reversal. On the downside, break of 1.0619 will indicate that such rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2460; (P) 1.2582; (R1) 1.2648; More...

Intraday bias in GBP/USD remains neutral for the moment. There is no change in the view that rebound form 1.1198 is seen as the third leg of the consolidation pattern from 1.1946. Hence, in case of another rise, we'd expect strong resistance from 1.2774 to limit upside and bring down trend resumption eventually. On the downside, firm break of 1.2411 minor support will argue that it's completed and turn bias to the downside for 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 112.11; (P) 112.73; (R1) 113.42; More...

Intraday bias in USD/JPY remains neutral for the moment and some consolidations could be seen above 112.04 temporary low. Deeper fall cannot be ruled out yet. But choppy decline is from 118.65 is seen as a corrective move. Hence, we'd expect strong support from 38.2% retracement of 98.97 to 118.65 at 111.13 to contain downside an bring rebound. On the upside, above 115.36 resistance will argue that such correction is finished and turn bias to the upside for 118.65. Break will resume whole rise from 98.97 and target 125.85 key resistance.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Daily Pivots: (S1) 0.9884; (P) 0.9911; (R1) 0.9952; More.....

USD/CHF spikes higher in early US session but upside momentum is unconvincing. Intraday bias remains neutral as the consolidation from 0.9860 temporary low is extending. Overall, outlook remains bearish with 1.0043 minor resistance on hold and deeper fall is expected. Decline from 1.0342 is seen as the third leg of the pattern from 1.0327. Below 0.9860 will target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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