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Strong US Payrolls and Manufacturing

By David Morrison  |  04/02/2019 15:22

Last week saw the Federal Reserve confirm its dovish pivot. But better-than-expected data releases raise speculation the US central bank may still raise rates this year
US and European stock indices got off to a mixed start this week, but with a softer overall tone. Investors are struggling to reconcile the Fed’s dovish pivot, which was confirmed after last week’s monetary policy meeting, with a clutch of solid data releases. The conundrum is that the US central bank is backing away from tightening monetary policy further, even as data releases continue to indicate a strengthening US economy. While there are concerns over a slowdown in growth across China and the Euro zone, there’s a suspicion that the Fed under Chairman Powell is no different from the Fed under Yellen, Bernanke or Greenspan. In other words, it isn’t the Fed’s dual mandate that drives its actions, but what’s happening to the S&P 500. Certainly, all the major US stock indices were oversold going into the Christmas break. But it was dovish comments from Powell early in the New Year which helped catalyse the strongest January equity market rally in 32 years.
Fed now ‘patient’
Last week the US Federal Reserve held its first monetary policy meeting of 2019. The FOMC statement and Chairman Jerome Powell’s subsequent press conference confirmed to many analysts that the central bank has performed a dovish pivot. The Fed removed the phrase “further gradual increases” in regards to adjustments to the fed funds rate and instead said it would be patient in future. The Fed also it would consider adjusting its balance sheet reduction programme if conditions warranted a change. All this contributed to a sell-off in the US dollar in a move which saw the Aussie Dollar and emerging market currencies as the major beneficiaries.
Payroll boom
Friday brought the latest update on US Non-Farm Payrolls. There was a particularly strong headline gain of 304,000 – well above the 165,000 anticipated, even considering sharp downward revisions to previous releases. Average Hourly Earnings came in lower than expected, suggesting that despite good employment numbers, wage growth inflation isn’t a worry for now. Later that day, there was a blow-out ISM Manufacturing PMI which showed, in contrast to Europe and China, that the US manufacturing sector remains buoyant. Given the strength of last week’s US data, there’s a danger that the markets will misprice the likelihood that the Fed won’t tighten again this year.
Chinese New Year
This week is a little less hectic than the one just passed. China’s markets are closed for the New Year/Spring Festival. On the economic calendar we have the Reserve Bank of Australia’s rate decision along with US ISM Non-Manufacturing PMI on Tuesday. The Bank of England’s Official Bank Rate and quarterly Inflation Report is out on Thursday and the fourth quarter earnings season continues with results from Alphabet after tonight’s close.
Dollar rallies
The US dollar rallied on Monday in a move which saw the EURUSD fall back towards intermediate support around 1.1400. Bear in mind, the pair had briefly broken above 1.1500 last Thursday, but failed to to hold here thaks mainly to a clutch of disappointing European data. If investors start to reprice the probability of further Fed rate hikes this year, then we could see the EURUSD retest support around 1.1300 pretty quickly.
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