A further slowing in growth
Bridging the gap is a song by American rapper Nas and as a tribute to his father the song aims to bridge the gap from blues, to jazz, to rap.
One of the big news from a relatively steady overnight session has come from the JOLTS report showing the gap between job openings and actual hirings in the US is now the widest ever. The Fed would argue that this is a signal of a tightening labour market and eventually higher wages pressures should help bridge or narrow this gap. Reaction to the data pushed the USD and UST yields higher. But then early this morning President Trump warned that threats from North Korea “will be met with fire and fury like the world has never seen”. UST yields and US equities moved lower on the news, but reaction in currency markets has been fairly muted so far.
The US JOLTS report revealed job openings surged to a record 6.2m in June and showed fewer people quitting their jobs and now unfilled jobs are 28% higher than the previous peak in 2007. So the US labour market tightened again in June and in theory this suggests higher wages pressures should eventually emerge as companies are forced to increase their wages in order to attract workers. Thus the data keeps the Fed on track for another hike latter this year, but with wages pressures not yet showing in higher average hourly earning the market remains sceptical. Earlier in the overnight session, the NFIB small business survey rose to 105.2 from 103.6. The first rise so far this year.
Reaction to the JOLTS report triggered a decent jump in the USD (DXY +0.60) with the euro the biggest mover in G10 currencies. Ahead of the data release, the euro was trading around 1.1820, dropping just over one big figure on the news to then settle around 1.1750. In contrast the AUD and NZD fell about 0.50% on the news. After trading to an overnight high of 0.7943, the AUD fell to a low of 0.7887 following the JOLTS report, but later in the session it recovered a bit of ground and now trades at 0.7915. Meanwhile the downward trend on the NZD established late in July remains in place with the JOLTS report adding further downward pressure on the Kiwi. NZD currently trades at 0.7330 and it is the biggest G10 loser, down 0.46% on the day.
In terms of the recent NZD weakness our BNZ strategist notes that we are effectively seeing a reversal of what we saw in the lead-up to the May MPS. Back then, the market was convinced that the Bank would adopt a more hawkish tone and yet it didn’t. The Bank held the line and maintained a neutral stance. Now the market is convinced that the Bank will adopt a more dovish tone and pricing has moved such that there now might be room for some disappointment on that score. So now, even a more dovish tone runs the risk of leading to some profit-taking on the day, seeing a modest reversal of recent trends in the NZD and rates, while the Bank holding its ground would see an even larger reaction.
JPY is the only G10 currency that has outperformed the USD. Notably, however, much of the outperformance came before the JOLTS report. JPY lost a bit of ground on the job news, but as UST yields retraced the initial move higher, JPY regained all its lost ground and now trades at ¥110.34, up 0.39% on the day.
So although JPY is stronger, its strength has not come from a typical safe haven bid. Reaction to Trump’s warnings to North Korea has so far elicited very little reaction in currencies. In contrast US equities have ended the day down between -0.15% and -0.24% with most of the loses recorded after President Trumps press conference.
10y UST yields started the overnight session very steady around 2.255% with the JOLTS report triggering a move to 2.28875%. Some of the mover was retraced shortly after the report and then President Trump comments exerted additional downward pressure. In the end 10y UST closed at 2.2619%, little changed on the day.
We have a light calendar today, but there are a couple of items which could garner some market attention. Of note this morning RBA’s Chris Kent speaks in Sydney and China gets its CPI and PPI readings for July. Also this morning Australia gets Housing Finance and its monthly Consumer Confidence reading. After yesterday’s solid NAB business survey, the question today is whether we will see a narrowing in the business-consumer divide that has been in place since 2014.
Tonight the US gets Nonfarm Productivity/Unit Labour costs (Q2 P) and Wholesale Trade Sales/Inventories (Jun).
Last Friday, the RBA’s Statement of Monetary Policy revealed a new set of forecasts which were largely unchanged from May. Importantly, however, the AUD assumption used in the analysis implied that had it not been for the stronger AUD (the technical forecasting assumption was AUD/USD at 0.80 vs 0.74 in May), a forecast upgrade would have been likely. Chris Kent, the RBA’s Assistant Governor (Financial Markets) speaks at a Bloomberg event this morning and he might take the opportunity to elaborate a bit more on the relationship between the AUD and the outlook for the economy.
China’s CPI is expected to remain unchanged at 1.5% in July while expectations for the PPI reading are for a small uptick to 5.6% from 5.5%.
On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +0.89bp to 2.26%. In commodities, Brent crude oil +0.00% to $51.98, gold+0.0% to $1,261, iron ore +0.0% to $75.46, steam coal -1.0% to $94.05, met. coal +0.0% to $194.00. AUD is at 0.7925 and the range since yesterday 5pm Sydney time is 0.7887 to 0.7943.
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