FYI | Sep 07 2013
By Kathleen Brooks, Research Director UK EMEA FOREX.com
It was a volatile few minutes – firstly, the G20 communique was released and son after the US payrolls report for August. The G20 sounds like it was a fairly fractious affair with Syria dominating the proceedings. But diplomacy overruled in the end, and the communique made no mention of Syria instead focusing on vague pledges to coordinate monetary policy withdrawal.
The most interesting inclusions in the communique were related to the end of extraordinary monetary stimulus: 1, monetary policy will be gradually normalised, 2, stimulus withdrawal will be “carefully calibrated”. It’s hard to see the Fed working with the ECB, especially since decisions at the ECB are hard enough to make with 17 central bankers all trying to agree on one thing. Thus, the G20 delegates essentially pledged not to do anything rash that could rock stock markets or cause extra pain in the emerging world. From a markets perspective it is fairly neutral, a pledge on Syria would have been more market-moving, but in the absence of any firm commitment that the US will launch a unilateral air strike, risk sentiment is fairly stable.
Payrolls – not bad enough to rule out tapering
A 169k reading of payrolls is just the type of report the market did not want. Payrolls missed expectations of 180k, but they weren’t dreadful, rising by a respectable 169k. But how is the market expected to react to this number? It’s one of those numbers that reminds of me of school children just back from the summer holidays who are not that interested in having a PE lesson in the rain so they try just hard enough not to get noticed by the teacher and told off. This is the payrolls report that just didn’t try very hard.
The detail of this report is worth looking at closely. Private sector payrolls were even weaker than expected, rising by 152k, versus expectations of 180k. Jobs were created in the health care and retail trade industry, the latter suggesting that consumer confidence is finally starting to have an impact on jobs. However, construction jobs were flat. This is worrying, as construction jobs had been trending higher for most of 2013, but perhaps rising mortgage rates are finally starting to impact the construction sector? The national average of the 30-year mortgage rate surged to 4.67% last week, the highest level since mid-2011.
Worrying developments in jobs report
This economic recovery is based on a pick-up in the housing market: a strong housing market creates jobs and boosts confidence, it is also symbolic – if the housing market is strong then it puts the ghosts of the subprime crisis behind us. One month’s data does not make a trend, but it’s definitely worth watching, as it is hard to see the Fed start tapering its QE3 programme if the housing market starts looking weak.
Why is the participation rate dropping and does it matter?
The participation rate is also a troubling aspect of this report. It fell to 63.2% from 63.4% in July, the lowest level since 1978. So why is the participation rate falling? Partly it is because of the retiring baby boomers, which could weigh on the participation rate for some time. This phenomenon isn’t down to politics, as some talking heads like to spin it, but rather because of demographics, there is a huge cohort of retirees that could alter labour market dynamics for some time. And it’s not just a US problem; it’s also prevalent in Europe and even China. So we better get used to the fact that fewer people will be working. The economic impact of this shift will take a long time to play out, but basically, it should reduce tax take down the line, which could weigh on the US deficit. Let’s hope the US continues pumping oil at its current rate to negate some of that deficit.
Market impact
Overall, the August payrolls report is dollar negative, but not enough to rule out tapering this September completely. Instead, it is likely to cause range trading into the all-important Fed meeting on 18th September. In terms of some dollar crosses worth watching: USDJPY may trade in a 98.80 – 100.20 range in the next few days, while EURUSD and GBPUSD downsides looks like they are supported at 1.3100 and 1.5550, respectively. Gold has drifted higher post the payrolls, but gains could be limited to this week’s high at $1,416. The tapering can has been kicked down the road to the Fed meeting, so expect market anxiety levels to remain high in the coming weeks.
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