August 2022

The US economy created 528K new jobs in July, doubling expectations and exceeding the peak employment level set before the pandemic. Notably, construction and manufacturing recovered, probably due to falling commodity prices in these sectors. The hourly earning rate has maintained at 5.2% y/y with an upward revision of the previous month and a gain of 0.5% for July. The unemployment rate declined from 3.6% to 3.5%, but this is mainly due to a decline in the active labour force from 62.2% to 62.1%. Such strong employment growth data came as a surprise to the markets. And understandably so, with the latest economic assessments betraying this picture. Weekly jobless claims have remained on an upward trend since March, and this divergence is not easy to explain. A solid increase in employment plus faster wage growth is raising expectations of a third consecutive 75 points Fed rate hike in September. CME's FedWatch tool shows a 69% chance of such a move, double that of a day ago versus 3.4% a month ago. This is obviously positive news for the dollar and negative for the stock market. Earlier in the week, Fed officials promoted the idea that markets were underestimating the central… Read More »Dollar soars as strong job growth paves the way for the third 75 points rate hike

Summary If the U.S. economy is in a recession, no one seems to have told employers. Nonfarm payroll growth in July was more than double the Bloomberg consensus, registering a 528K monthly gain. This marked the second fastest pace of job growth in 2022. Employment growth was broad-based with nearly all major sectors adding jobs in the month. Average hourly earnings data added further fuel to the fire, increasing 0.5% in the month and 5.2% over the past year. The unemployment rate fell a tenth of a percentage point to 3.5%, which matches the 50-year low reached in 2019. Broadly speaking, the economic data are sending mixed messages at present, and the white-hot payroll numbers look increasingly out-of-line with other data points. That said, employment growth of more than half a million jobs per month and a falling unemployment rate are hard to ignore, and we suspect this data will give the FOMC the confidence it needs to push ahead aggressively with its fight against inflation. At least a 50 bps rate hike at the September 20-21 FOMC meeting seems likely at this point in time, and yet another 75 bps hike could be in store if inflation over the… Read More »Employment report: Fireworks in July

Summary The Reserve Bank of Australia (RBA) raised its Cash Rate by 50 bps to 1.85% at its August meeting and signaled that further rate hikes will be needed to bring inflation back toward target over time. Several elements of the monetary policy announcement were essentially unchanged from previous meetings. However, there were also some important changes in language that lead us to believe the RBA will revert to smaller hikes going forward. Notably, the central bank indicated that while further normalization of policy is expected in the months ahead, it also noted that policy is “not on a pre-set path”. The RBA also dropped references to “extraordinary monetary support” that had appeared in previous announcements, suggesting it now sees itself a bit further along the monetary tightening path, and perhaps does not need to move at an accelerated 50 bps pace anymore. Given these changes, we believe the RBA will be more flexible moving forward with regard to the size and timing of future rate hikes. With signals of further tightening but more flexibility, we now expect 25 bps rate hikes at the RBA's next several meetings in September, October, November, December and February, which would see the Cash… Read More »Reserve Bank of Australia sees flexible path forward

As written yesterday, GBP/USD highs were located at 1.2197, 1.2214 and 1.2233. GBP/USD traded perfectly to 1.2214. Lows at 1.2072 and 1.2063 traded exactly to 1.2064. Then longs dead stopped perfectly at reported range top at 1.2174. Vital to 1.2214 and 1.2063 are perfect levels. GBP/USD knew exactly where it would trade. If GBP/USD traded in between price at an interval then the message is GBP/USD contains a hesitant price and is not certain to direction. The larger range yesterday was 1.2174 to 1.2009. GBP/USD traded 40 pips above 1.2174. Next week's range: 1.2181 Vs 1.2020. GBP/JPY short strategy traded 200 pips lower. Longs next week must trade above 162.07. DXY traded 178 pips this week while USD/CAD traded 124 pips. USD/CAD's months long problem is short ranges to DXY. USD/CHF traded 181 pips Vs DXY 178. SPX traded 88 pips this week, 226 last week and 188 points 2 weeks ago. SPX trades consistent to DXY 200 ish pip ranges. A free trade to longs and shorts for free money occurs when SPX trades above or below DXY ranges. EUR/USD's overall range this week began at 1.0283 to 1.0136. Next week: 1.0290 Vs 1.0155. EUR/USD big break for higher… Read More »Currency market: GBP/USD and FX next week

US CPI (Jul) – 10/08 – with US CPI reaching another 40 year high of 9.1% in June, there was some concern that the Federal Reserve might have been tempted to go for a bigger than expected 100bps rate move in July. While the headline number grabbed all the attention it was notable that core prices fell back from 6% to 5.9%. Concerns about a 100bps rate move in July didn’t last very long as two of the most hawkish members of the FOMC pushed back against the idea, saying that they felt that 75bps was sufficient. Since those numbers were released, the debate has moved on a touch with concerns over a recession now outweighing concerns over aggressive central bank tightening. Bond market pricing since the June CPI numbers were released has seen prices rally strongly and yields fall back. Part of the reason for this change of tack has been the belief that while the Federal Reserve is likely to continue to talk tough on inflation in the short term, and continue to hike rates into year end, they will find it difficult to continue to do so into next year. We’ve already started to see weakness in… Read More »The Week Ahead: US CPI, UK Q2 GDP, Deliveroo, Aviva and Disney results

The US gained a whopping 528K jobs in July, far above expectations.  Strong wage growth adds to the notion of a 75 bps hike in September and is set to keep the dollar bid Only a drop in inflation could chang the course of the greenback beyond minor correction.  Help wanted, and much more of it – that is what the Nonfarm Payrolls report tells markets about the state of the hiring in America. Contrary to most Nonfarm Payrolls reports, the verdict on this one is clear – a monster report.  The US gained 528,000 jobs in July, more than double the early expectations of 250K, exceeding any upgraded expectations based on leading indicators – and on top of upward revisions. July's gain comes on top of 26,000 additional jobs updated for June. Despite rapid hiring, wage growth accelerated. It rose by 0.5% MoM in July, above 0.3% projected, and 5.2% YoY, beating early estaimtes for 4.9%. The only downside is a 0.1% slide in the participation rate to 62.1%. Neverhteless, the US is just 32,000 jobs short of pre-pandemic employment.  The impressive report seemed to have pushed away recession fears – at least for now – and substantially increased… Read More »NFP Analysis: America’s labor market is red hot, only weak inflation could dethrone King Dollar

Gold closed the third straight week in positive territory. $1,780 aligns as key technical level for XAU/USD. July inflation data from the US could trigger a strong reaction next week. Gold started the month of August on a firm footing and climbed toward $1,800 before erasing a portion of its weekly gains on Friday. The sharp decline witnessed in the US Treasury bond yields and the dollar’s uninspiring performance allowed XAU/USD to gain more than 1% during the first half of the week. Following the impressive July jobs report from the US, however, gold reversed its direction. The July inflation report from the US next week will be the next significant catalyst for the pair. What happened last week? The dollar sell-off continued at the beginning of the week and the US Dollar Index declined to its weakest level in nearly a month below 106.00. The data published by the ISM revealed on Monday that the Prices Paid Index of the Manufacturing PMI survey declined to 60 in July from 78.5 in June, revealing a significant softening in price pressures. Investors continued to scale back 75 basis points (bps) Fed rate hike bets in September on this data and gold… Read More »Gold Weekly Forecast: Recovery could end if US CPI data confirms 75 bps Fed hike

GBP/USD snapped two straight weekly gains after dovish BOE hike. UK Q2 GDP could confirm a potential recession, US inflation is also crucial. Acceptance above 1.2200 is critical for GBP bulls to sustain the recovery. GBP/USD bulls faced exhaustion after two straight weekly advances and therefore, ended the week in negative territory. The Bank of England’s (BOE) dovish rate hike and persistent recession fears could be linked to cable’s underperformance. The impressive US July jobs report on Friday highlighted cable buyers’ hesitancy heading into the critical US inflation and UK quarterly GDP releases. GBP/USD: What happened last week? The US dollar’s weakness extended at the start of the week on Monday, as risk flows dominated amid a reduced probability of a 75 bps Fed rate hike in September. GBP/USD built on last week’s 150 pips gains and hit the highest level in four weeks at 1.2293, in anticipation of a 50 bps rate hike by the BOE to combat inflation. But the greenback sprung back to life towards the mid-week, as recession fears amplified alongside escalating geopolitical tensions. The safe-haven bids for the dollar resurfaced ahead of US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan, despite China’s warning… Read More »GBP/USD Weekly Forecast: Down but not out? Focus shifts to US inflation, UK GDP

EUR/USD – 1.0240 Despite euro's retreat from Tue's near 4-week high of 1.0293 to 1.0124 (Wednesday), subsequent rebound to 1.0253 in New York yesterday on broad-based usd's weakness suggests choppy swings would continue ahead of key U.S. jobs report, above 1.0293 needed to extend rise from July's 0.9953 bottom to 1.0334, break, 1.0360. On the downside, only a daily close below 1.0209 signals intra-day top is made n heads back to 1.0161 (New York low), 1.0124. Data to be released on Friday: Australia AIG services index, Japan all household spending, coincident index, leading indicator. UK Halifax housing prices, France current account, trade balance, industrial output, imports, exports, non-farm payrolls, Italy industrial output. U.S. non-farm payrolls, private payrolls, unemployment rate, average weekly earnings, Canada employment change, unemployment rate and Ivey PMI.

Outlook: Today’s is jobless claims (expected up to 259,000 from 256,000 a week earlier) ahead of the big kahuna tomorrow, nonfarm payrolls. The markets are suspiciously quiet and in a narrow range, with a lull like this usually preceding some fancy volatility and sometimes a breakout. Risk sentiment is not exactly on a knife edge, but it’s not taking a clear direction either. If we take the S&P as a bellwether, risk appetite is on an upswing and we see that in the CAD/AUD/NZD, too. This is not a commodity play but rather a growth play, with the AUD notably reflecting growth in Asia generally and China in particular, despite scare stories about China stumbling. If it’s buying iron (but not coal), it’s hardly on its sickbed. In the US, the risk of recession seems to have retreated now that the ISM services PMI unexpectedly rose to 56.7 in July from 55.3 in June and beating market forecasts of 53.5. Trading Economics notes output and new orders rose while employment fell only a little and price pressures eased (72.3 vs 80.1). Not so much fin–inventories fell at a faster pace (45 vs 47.5). “Availability issues with overland trucking, a restricted… Read More »In the US, the risk of recession seems to have retreated