This week brought fresh evidence to support the notion that the U.S. economy continues to fire on all cylinders, as gauges of manufacturing and services sector activity came in ahead of expectations.
The data continues to support the Fed’s upbeat take on the U.S. economy, although business leaders this week attempted to convince the Trump administration that the next round of proposed tariffs on China could be the tipping point.
Tech companies including Cisco and HP sent letters to the USTR on Thursday as the comment period expired on the next round of 301 investigation-related duties. Other correspondence sent to Robert Lighthizer stressed that small and medium-sized enterprises as well as manufacturers are struggling to adapt to the new trade regime and won’t be nimble enough the deftly navigate the increasingly choppy waters in which global supply chains are being disrupted.
In any event, right now this isn’t showing up in the macro data and Friday brings August payrolls.
As ever, the data and the messaging will be parsed for anything that reinforces the crowded long USD trade. The greenback’s relentless ascent since April has weighed heavily on EM and ex-U.S. risk sentiment more generally as chatter about a dollar liquidity crunch continues to permeate the narrative.
Just when it looked like something was on the verge of snapping in mid-August, Trump renewed his criticism of the Fed. His comments, along with the perception that Powell was dovish at Jackson Hole and, importantly, the PBoC’s move to reinstate the counter-cyclical adjustment factor in the yuan fix, together conspired to slam the brakes on the greenback rally. That, in turn, gave emerging markets a fleeting bit of respite which helped green light U.S. stocks to summit new peaks.
Since then, the situation in EM has deteriorated further, raising fresh concerns about the relative wisdom of the Fed’s approach to international developments which, so far, seems to be to ignore them until there are convincing signs of spillover.
The net long in the dollar was trimmed a bit in the week through last Tuesday, but still sits at $24.7 billion overall.
Meanwhile, the spec short in the 10Y was pared substantially during the same week but the trade is still very crowded. The latest data out later Friday will give everyone a fresh read on things.
Again, as long as the data continues to come in strong in the U.S., the dollar is likely to remain supported. Trade jitters have also been bullish for the dollar this year for several reasons, not the least of which is the prospect that eventually, Trump’s tariffs will end up feeding through to consumer prices, making the Fed more wary of an inflation overshoot and thus more inclined to hawkishness.
“And when I look at NFP changes against the ISM employment indices, the latter have been recovering,” SocGen’s Kit Juckes wrote on Friday morning, adding that since there’s “no sign of US slowdown, President Trump is empowered in his trade tactics, and keeping the Fed on its steady rate-hiking path.” That, Juckes continued, is “a recipe for continued stress in FX.”
Last week, Goldman suggested traders might be underestimating the significance of Jerome Powell’s reference to a study by Christopher Erceg, James Hebden, Michael Kiley, David Lopez-Salido, and Robert Tetlow, in his Jackson Hole speech. Specifically, the bank notes that Powell’s nod to the research likely tips an inclination to assign at least as much weight to the labor market (which is arguably overheating) as the inflation data when thinking about the course of monetary policy. That’s hawkish at the margin as opposed to the market’s dovish interpretation of the speech.
The July jobs report was a mixed bag, missing on the headline but tipping wage growth that’s still firming.
In any event, here are the expectations and priors:
- Change in Nonfarm Payrolls, est. 191,000, prior 157,000
- Change in Private Payrolls, est. 194,000, prior 170,000
- Change in Manufact. Payrolls, est. 22,500, prior 37,000
- Unemployment Rate, est. 3.8%, prior 3.9%
- Underemployment Rate, prior 7.5%
- Average Hourly Earnings MoM, est. 0.2%, prior 0.3%
- Average Hourly Earnings YoY, est. 2.7%, prior 2.7%
- Average Weekly Hours All Employees, est. 34.5, prior 34.5
- Labor Force Participation Rate, prior 62.9%
And here are the numbers:
- U.S. Aug. Nonfarm Payrolls Rose 201k; Unemp. Rate at 3.9%
- Nonfarm payrolls, net revisions, -50k from prior two months
- Participation rate 62.7% vs prior 62.9%
- Avg. hourly earnings 0.4% m/m, est. 0.2%, prior 0.3%
- Y/y 2.9%, prior 2.7% est. 2.7%
- Nonfarm private payrolls rose 204k vs prior 153k; est. 194k, range 155k-237k from 32 economists surveyed
- Manufacturing payrolls fell 3k after rising 18k in the prior month; economists estimated 23k, range 20k to 41k from 18 economists surveyed
- Unemployment rate 3.9% vs prior 3.9%; est. 3.8%, range 3.7%-4% from 76 economists surveyed
- Underemployment rate 7.4% vs prior 7.5%
- Change in household employment -423k vs prior 389k
Not to put too fine a point on it, but that is a hot AHE print. 0.4% MoM is double estimates and 2.9% YoY is well ahead of the 2.8% that some of Wall Street was expecting, even as consensus was just 2.7%.
This will likely stoke inflation jitters.