Strong US payroll number buoys dollar
07/Jul/2014 • Currency Updates•
Last week saw the unusual occurrence of the ECB post-meeting press conference coinciding with the release of the most important single economic report worldwide, US payrolls. While the ECB meeting turned out to be a bit of a non-event (save for some procedural changes to the meetings themselves -see below), us jobs data provided a positive surprise that should largely dispel doubts about the strength of the US recovery. Unsurprisingly, equities worldwide rallied to new records and the dollar was well supported, although the tight ranges of the previous weeks held among most major currencies and crosses.
PMI business sentiment indices released last week continue to paint a picture of strong growth. While both the manufacturing and services PMI’s pulled back somewhat last month, they remain at levels well above historical average and consistent with above-trend GDP growth of over 3%. Separately, the Bank of England reported the fourth consecutive monthly drop in mortgage approvals for May. This should go some way towards easing concerns about overheating in the housing market. Together with the headwinds that the external sector will experience because of Sterling strength, we continue to think that the most likely timing for the first hike is the first quarter of 2015 rather than the last one of 2014.
The ECB made no further policy easing, however, it did clarify how the new TLTRO facilities for new bank lending will be structured. It also surprised markets somewhat by announcing a change in the frequency of its meetings to every six weeks, as well as stating that it will begin publishing the minutes from each meeting before the next. None of this was intended to have an immediate market impact, and it didn’t. Of more immediate import was the confirmation that the PMI indices had slowed significantly in June, with the composite index falling to 52.8 in the latest month. Going by the more recent correlation between this index and GDP growth, these levels are consistent with our expectation of continued sub-1% growth across the Eurozone. This level is not sufficient to either make significant progress in the unemployment rate, or to ensure sustainability of peripheral debt burdens.
The June payroll report was the strongest since the Great Recession. 288,000 net jobs were created, and the unemployment rate came down from 6.3% to 6.1% – incidentally, the level extant during the month Lehman Brothers went under, back in September 2008. Overall labor income in the second quarter grew at a 5.8% annualised rate, which should provide good support to consumer spending in both the second and third quarters. Second tier reports in auto sales, the housing sector and capital goods also turned higher, as did both exports and imports in May. Clearly, the picture is one of accelerating growth after the weather-related winter doldrums. We are looking at revising our forecast for US growth in 2014 higher on the back of these, and do not see how the Federal Reserve can keep rates near zero, much beyond the first quarter of 2015