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Monday 19 March 2018

Robust payrolls report paves the way for Fed rate hike

Federal Reserve Building in Washington, DC, United States. Art Deco/Neoclassical style.
Federal Reserve Building in Washington, DC, United States. Art Deco/Neoclassical style.

Richard Ramsey

Last week’s ECB policy announcement was something of a damp squib as far as markets were concerned with President Mario Draghi over-promising and under-delivering.

The failure to increase the quantity of monthly QE purchases and to announce an even deeper cut in the deposit rate left markets disappointed. This led to considerable price action on the currency markets with the euro surging on the back of the ECB’s tame monetary policy announcements. EUR/USD started last week at $1.058 and briefly touched a post-ECB announcement high of $1.0980 last week. However, the currency pair is now changing hands at $1.081 with weaker than expected German industrial production figures hitting euro sentiment this morning. EUR/GBP rose from 70.4p at the start of last week to 72.5p on Thursday evening. However, the currency pair has eased back to 71.8p this morning. Yesterday’s French local elections have been dominated by the National Front. The far right anti-EU party has won 29.5% of the votes cast nationally. Marine Le Pen’s party led the votes in 6 out of 13 regions and is very well positioned to take over at least three regions at the second and last round of elections next weekend. It is the best score ever registered by the party. This raises the prospect for more political risk in the Eurozone in 2016.

Following Draghi’s disappointment last week, the focus now turns to the Federal Reserve with a 25bps rate hike in prospect next week. Friday’s US nonfarm payrolls report was seen by many to be the last obstacle standing in the way of a Fed interest rate hike. Given that Friday’s reading was stronger than expected, all the economic boxes have now been checked. Nonfarm payrolls rose by 211,000 with net upward revisions of 35,000 (October's already outsized gain was revised up from 271,000 to 298,000). The average payroll gain since June has been 206,000. Meanwhile the unemployment rate remained unchanged at 5.0%. Average hourly earnings also increased in line with expectations 0.2% m/m. The November employment release paves the way for Fed action in December.

Outside of the currency markets there has been plenty of price action elsewhere. The price of Brent crude oil is down 4% over the last week. This takes the price of black gold down from $45pb at the start of last week to sub-$43pb this week. The oil price fell last week following news that OPEC was planning to maintain production levels near record highs. Meeting last week OPEC removed any reference to production targets. This should mean that the current oil glut should continue next year with Iran trying to rebuild its market share. The recent falls in oil prices should feed through to even lower petrol prices in the forecourts in the New Year.

Relative to last week’s economic release calendar this week is set to be a rather dull affair. The Bank of England’s MPC policy announcement is expected to be a non-event. No change and no statement expected. Before then we have the latest industrial production figures for October. These are somewhat dated with the more timely manufacturing PMI signalling a slowdown in November. The outlook for UK manufacturing in 2016 has darkened somewhat according to the EEF. The latter’s latest manufacturing survey has revealed that output and new orders are now deteriorating at rates not seen since 2009. A slowdown in industrial production is also evident in Germany. Figures released this morning from the Eurozone’s largest economy revealed a growth rate of just 0.2% m/m in October. This was a quarter of the growth rate anticipated. There will be little in the way of data in either the US or the Eurozone this week to get financial markets excited about. Friday’s US retail sales figures are the pick of the bunch. Following October’s lacklustre performance, retail sales are expected to show a pick-up in November. Overall, financial markets are expected to maintain their holding pattern ahead of next week’s FOMC policy announcement. The first US rate hike in almost a decade beckons.

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