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So Much Drama in the NFP

by Karl Schamotta | September 2, 2016

Payroll Disappointment Crushes Dollar

 Shares, Emerging Markets, Commodities Receive Respite

 Canadian Exports Recover – Somewhat

 

With so much drama in the NFP, it’s kinda hard sittin’ on the F.O.M.C. The dollar is falling, and global stock markets are rising this morning after the United States added 151,000 jobs during the month of August -disappointing investors who had positioned themselves for another blockbuster report. Emerging market and commodity-linked currencies are experiencing solid gains, with recently-beleaguered units like the South African rand and Russian ruble seeing substantial inflows in the announcement’s aftermath.

Consensus expectations had coalesced around the 180,000 mark ahead of the release, with almost a quarter of market participants believing that the report would set the foundation for a rate hike at the Federal Reserve’s September meeting. Instead, these hopes were dashed – with the unemployment rate barely budging, and wage growth falling to a six-month low, policymakers are likely to wait for new data before pulling the trigger on an interest rate hike.

That said, we do believe that the market is in danger of assigning too much importance to this number. More noisy than a Clinton-Trump presidential debate, and subject to just as many post-hoc revisions, non-farm payrolls reports are notoriously deceptive when taken in isolation.

Across the board, economic data releases are showing economic slack disappearing, and both the Atlanta and New York Fed now-casting models are suggesting that a feared loss of momentum has not materialized over the past month. When paired with nearly-full employment, and almost-but-not-quite-there core inflation levels, it appears that the United States is nearing fulfillment of the Federal Reserve’s stated objectives.

Given this backdrop, we expect that Fed officials will begin telegraphing a December hike at, and around the September 21st policy meeting. If so, we should see yields stabilize on the front end of the curve, providing some modest lift to the dollar, while keeping emerging markets, high-yielding risk instruments, and equity markets flush with cash for a few months yet.

Here in Canada (where there’s no Labour Day without “u”) the loonie is pushing higher, supported by a surprisingly positive merchandise trade report released this morning. Canada’s exports increased 3.4% to $42.7 billion, and imports fell slightly to $45.2 billion – narrowing the country’s trade deficit to $2.5 billion for July. Excluding energy products, exports were up 4.1%, marking the strongest increase since late last year.

This report should reduce pressure on Stephen Poloz ahead of next week’s Bank of Canada meeting, lowering the likelihood of a rate cut – from one of the only major central banks which still has rates to cut. To an extent, this report supports Mr. Poloz’s expectation that the impact of the Fort McMurray wildfire has begun to fade from view, but serious questions remain about the economy’s fundamental underpinnings.

Exports are have fallen almost seven percent over the past twelve months, and the country is still on track to post a record trade deficit for the second year in a row. Despite massive depreciation in the exchange rate over the past two years, it appears that a widely hoped for rebalancing isn’t taking place – instead of tilting away from its dependence on energy, Canada remains heavily reliant upon an increasingly debt-fuelled housing market to drive growth.

Failing a profound downgrade in American monetary tightening expectations, or a massive rally‎ in oil prices, the Canadian dollar looks headed into a turbulent autumn. In this of course, it won’t be alone – with most major central banks due to make interest rate announcements, an oil cartel meeting, and the first presidential debate scheduled, market equilibria are likely to be disturbed in a serious manner over the coming three weeks.

Don’t worry – you’ll wake before September ends.

Counterparties:

Some things to read while you’re sippin’ on gin and juice:

New York Times: Central Bankers Hear Plea: Turn Focus to Government Spending

Wonkblog: The Sneaky Math That Made the Lottery More Alluring, and Harder to Win

Wall Street Journal: Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants

Federal Reserve Bank of San Francisco: Projecting the Long-Run Natural Rate of Interest

Project Syndicate: Global Growth – Still Made in China

Bloomberg: Currency Traders Can’t Lose as Strategies Reap Big Gains

Wall Street Journal: When Economic Doomsayers Stumble

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