Tuesday 21 January 2020

Daily Market Update: Healthy US jobs figures steady the dollar, but sterling continues to slide


Simon Barry

Friday’s US payrolls showed stronger than expected employment growth in March.

Payrolls are a good indicator

Non-farm payrolls rose by 215k, ahead of consensus expectations for a gain of 205k, led by private sector growth of 195k (190k expected). Regular readers will know that because the data are so volatile (and prone to revision) we always place more emphasis on the trend in payrolls than on the latest single data point. And the story here is one of an economy which continues to generate steady and healthy jobs growth. Indeed, the one-month change in March is broadly in line with average pace measured over both the past three and twelve months, which stand at 209k and 234k respectively.

Earnings growth was also a bit firmer than expected 2.3% y/y, and while wage growth is coming under some upward underlying pressure in our view, the extent of that underlying pressure shouldn’t be triggering any major concern, for the time being at least. Elsewhere in the report, the unemployment rate ticked up from 4.9% to 5%, but this was because the increase in the labour force outpaced the gain in employment. In particular, the participation rate rose for the fourth month running to stand at a 2-year high. This is an indication that the sustained improvement in the labour market is beginning to induce more workers back into the jobs market and that the increase in the jobless rate in March occurred for ‘good’ reasons.

Other signals

Also on Friday we had the latest ISM index of manufacturing activity which also beat market forecasts. The ISM rose for the third month in a row to post 51.8 in March – its highest level since last July and its first above-50 reading in six months. The underlying detail was strong, highlighted by strong increases in both overall new orders and new export orders. We regard the signal from the ISM as an important development as it suggests that the worst could be over for the US manufacturing sector after a very difficult 2015 when the sector was buffeted by the combination of a very strong appreciation of the dollar and a sluggish growth environment.

Improvement continues

Overall, the March jobs and ISM reports provide further important evidence of both ongoing improvement in the US labour market in particular and resilience of the economy in general, despite concerns about global uncertainties and risks. In our view, it looks as if domestic economy developments continue to support the Fed’s latest, and more dovish, guidance for two hikes this year. With markets not even fully priced for one such hike, we continue to expect a dollar-positive re-pricing of US interest rate expectations over time, though the global outlook remains a source of downside risk to the US. Having briefly traded as high as $1.1435 just before Friday’s jobs figures, Eur/USD is back below $1.14 this morning, opening at $1.1380 helped by the constructive tone to the US data. But in truth, the largest FX market movements among the majors since Friday morning has seen sterling come under renewed downward pressure, with Brexit risks again to the fore in this regard.

Some polling over the weekend showed the leave camp potentially gaining some ground, while a Deloitte survey of CFOs highlighted higher uncertainty and weaker confidence and softer spending and hiring plans as the referendum was cited as the biggest single risk facing companies. This has taken Eur/GBP back over the 80p mark for the first time since late 2014, with risks still skewed to the downside over the coming weeks. Tomorrow’s services PMI for March will likely be important in shaping market perceptions about real-economy Brexit impacts. Recall that last month’s index fell very sharply, raising concerns that uncertainty effects were potentially already taking hold. Markets are expecting some partial retracement of these losses in tomorrow’s report, but sterling is vulnerable to any downside surprise here we think.

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