Ok, well if you were looking for a reason to think the reflation narrative isn’t completely shot to shit stateside, you probably took some solace in Friday’s jobs report.
As we noted before the number hit, the Mueller news that crossed at 3:30-ish on Thursday afternoon really put the dollar in a precarious position headed into Friday.
There were already enough reasons to be skeptical about this administration’s ability to ever (let alone imminently) get moving on their ostensibly growth-friendly agenda without the Mueller probe escalating. If the headline number had missed this morning or worse, if the AHE print had been a disappointment of any magnitude, the bottom could have really fallen out for the greenback – especially given how badly EURUSD wants to hit 1.20.
Well mercifully, the opposite happened. The report was decent, the dollar had its best day since January, and yields responded accordingly (full recap here):
Still, this is looking more and more like the labor market versus the rest of the economic world.
It’s been a game of “who you gonna believe, me the purportedly overheating labor market or your lyin’ disinflationary eyes” for quite some time now and lest you should forget that this is effectively a tale of two economies, here’s BofAML to remind you that besides the jobs data and sentiment indicators (with the latter basically amounting to “hope”), nothing is moving in the right direction…
Jobs and sentiment vs. everything else
A strong employment report for July, with net 209K additional jobs created and declining unemployment, reinforced that the labor market continues to be a bright spot in the US economy along with sentiment (Figure 1).
Of course all other data – including housing and real estate, the industrial sector, the personal/household sector and retail & wholesale – generally speaking continue to disappoint (Figure 2). Still the jobs report is positive for credit spreads as it mitigates the impact of yesterday’s weak ISM Nonmanufacturing number, and crucially allows long term interest rates to retrace yesterday’s dip (Figure 3). This help should bring some yield-sensitive demand back to the market.