Tuesday 23 January 2018

Daily Market Update: Eur/USD back under $1.14 after US data show firming of jobs and core inflation trends


Simon Barry

In yesterday’s comment we noted the relatively upbeat message about recent labour market developments in the US...

In yesterday’s comment we noted the relatively upbeat message about recent labour market developments in the US contained in the Fed’s Beige Book, and how that message cast some doubt over the signal being provided by the weak September payrolls report. Yesterday’s weekly jobless claims numbers provide the latest instalment of timely evidence on how the jobs market is faring and yesterday’s much better than expected reading is clearly more supportive of the more positive Beige Book perspective than the much less upbeat picture painted by September payrolls. Initial jobless claims fell to 255k in the latest week, tying for the lowest reading of the current cycle. And on an underlying trend basis the 4-week average has fallen to 265k: not only is that the lowest reading of this cycle, it actually represents the lowest 4-week average reading for claims since late 1973!

Taking the Beige Book together with these claims figures, it seems to us that the US labour market is continuing to register healthy improvement. The extent to which that more positive assessment is validated by the October and indeed November payrolls reports will have a very important bearing on Fed policy in the months ahead, and indeed market expectations thereof. Yesterday’s CPI inflation numbers were also firmer than expected, with core inflation ticking up to a 14-month high of 1.9% in September (1.8% was expected). From 1.6% at the end of last year, core CPI inflation has been edging higher for much of this year – a trend that may give Fed officials that bit more confidence they desire regarding the likelihood of inflation returning to the 2% target over time. Again, it will be important to see if this drift upwards becomes more visible in other measures, including the Fed’s preferred gauge – the core PCE deflator – which at 1.3% y/y is a bit further below target than the CPI. Interestingly, influential Fed member and New York Fed President Bill Dudley said yesterday that the FOMC should still raise interest rates this year so long as the economy stays on track, though he did caution that growth may be slowing (yesterday’s regional NY Empire and Philly Fed surveys suggest manufacturing remains under some pressure).

The firmer tone to the US jobs and CPI data has lent some support to the dollar, notably against the euro where Eur/USD opens this morning at around $1.1360 as it continues to pull back from the intra-week high of close to $1.15 from early yesterday. There is also an element of a weaker euro in this move, as the single currency is also under pressure against sterling, trading back below 73.5p as this pair too distances itself from its high earlier in the week of close to 75p.

Looking to the day ahead, the results of the preliminary University of Michigan survey of US consumer confidence are released for October. After unexpectedly dipping to 87.2 in September, market expectations are for a mild pickup to 89.0 in October. Markets will be looking for clues that solid domestic consumption will continue to provide a bulwark against cooling global growth. Industrial production is also announced and a reading of -0.2% m/m is expected after a 0.4% fall in August.

Lastly, the final measure of Eurozone HICP inflation for September is reported. Expectations are for the headline rate to remain at -0.1% y/y and for the core (ex. energy & unprocessed food) measure to stay at 0.9% y/y

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