Originally published by Rivkin Securities
All eyes were on the US non-farm payroll data released on Friday as investors look towards the timing of the Fed’s first rate hike in 2017. Month-on-month 227,000 jobs were added in January, well above the 175,000 estimated and previous revised reading of 165,000 in December. In a further encouraging sign that the improving labour market is drawing those who had previously left, the labour force participation rate increased from 62.7% to 62.9%. This resulted in a slight increase in the unemployment rate to 4.8% from 4.7%. The underemployment rate, which measures those who are unable to find but would prefer full-time work, also increased to 9.4% from 9.2% in December.
A key aspect of the report was average hourly earnings which rose less than forecast. Year-on-year in January average earnings increased +2.5% below the 2.7% forecast and previous +2.8%. While the job report overall highlights that the US labour market continues to tighten, the disappointing wage growth figures imply that the Fed can leave rates on hold a little longer without getting overly worried about inflation.
Following the jobs report the implied probability of a hike at the Fed’s March 14-15th meeting fell to 13.3% from 17.7% the prior day. The June 13-14th meeting remains the most likely to see the first hike of 2017 with a current implied probability of 48.5%. Still nothing is certain and there is a vast amount of data released before the March meeting that could sway the Fed to raise borrowing costs in March including, U.S. CPI on February 16th, the 2nd estimate of Q4 GDP on March 1st, the non-farm payrolls for February on March 11th and finally the Fed’s preferred gauge of inflation, the PCE index on March 15th.
The U.S. dollar index finished -0.06% lower on Friday, with the two-year treasury yields little changed at +1.209% while the ten-year yield gained +2 basis points to +2.491%. US equity markets were boosted to be within an inch of new all-time highs, both the S&P 500 and Nasdaq 100 gaining +0.73% and +0.27% respectively. The S&P500 saw broad buying, with 420 of the 505 constituents advancing for the session led by the financial sector which jumped +1.76% following an executive order by Donald Trump ordering the treasury to begin the review process to repeal regulation.
The chart below shows the Australia dollar which has gained +6.8% since the start of the year on the back of US dollar weakness, higher commodity prices and a record trade surplus. These gains would not have escaped the attention of the Reserve Bank of Australia ahead of a rate decision on Tuesday at 2:30pm Sydney time. Commentary from the bank will likely continue to highlight that a rising exchange rate complicates the transition of the economy from mining investment to services. Still the underlying fundamentals somewhat support the higher exchange rate and the RBA is unlikely to make any changes to monetary policy in the coming months as it balances below target inflation against the build-up of financial leverage by households.
This morning we can expect a reversal of Friday’s -0.42% decline for the S&P/ASX 200 with ASX SPI200 futures closing +24 points higher on Friday.
Data releases:
· Australian Retail Sales (MoM Dec) 11:30am AEDT
· Chinese Caixin Services & Composite PMI (MoM Jan) 12:45pm AEDT
· Euro-zone Markit Retail PMI (MoM Jan) 8:10pm AEDT
· Euro-zone Sentix Investor Confidence (MoM Feb) 8:30pm AEDT
Chart 1 – AUD/USD
