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They see me Payrollin’

by Karl Schamotta | August 5, 2016

And they not hatin’ the dollar. Foreign exchange markets are seeing a massive move into the greenback this morning, after the Bureau of Labor Statistics reported that the American economy created more than 255,000 jobs in July and revised the June number up to 292,000, while highlighting an additional increase in wages going into the release, traders were positioned for the addition of roughly 180,000 new roles, and flat hourly earnings growth around the 2.6 percent mark – meaning that the actual print smashed expectations and put a 2016 rate hike firmly on the table.

While this was an unquestionably positive release, and certainly bolsters the case for monetary tightening, we would suggest that today’s gains could fade over the coming days. Yields are likely to remain well-supported for now, but many market participants are looking for opportunities to de-risk going into the latter half of a notoriously volatile August. A number of indicators are suggesting that the global economy is likely to cool, and with more payrolls due for release between now and the next Fed meeting, this report won’t be considered in isolation. It ain’t over till Yellen sings after all…

Here in Canada, our beer is cold, and our employment market is even colder. Numbers released by the national statistics agency this morning showed that the country managed to lose 31,000 jobs through the month of July, dramatically underperforming expectations for a 10,000 increase – even as our dumpster fire of a housing market continued to burn ever hotter.

Over the same period, the trade deficit hit a record 3.63 billion Canadian dollars, with the export sector delivering its worst performance since the depths of the financial crisis in 2009. Debt-drunk households continued to spend like there’s no tomorrow, worrying observers who had hoped that Canadians might finally begin deleveraging and recover some of that prudence that we’re famous for.

In tandem with a slight reversal in the crude oil price, the loonie’s upward momentum seems to have stalled around a big psychological barrier, suggesting that risks will remain tilted toward the downside in the coming days and weeks.

In the land of receding chins and diminished economic prospects, the pound sterling is closing out the week on a substantially weaker footing. In a widely-expected move, the Bank of England erred on the side of caution yesterday, cutting its benchmark lending rate to a 322-year low, expanding its bond-buying programme by 60 billion pounds, purchasing an additional 10 billion pounds in corporate issuance, and starting a project designed to incentivise lending to households and businesses. In its accompanying monetary policy summary, the institution lowered economic growth forecasts for the latter half of the year, and ratcheted expectations down to 0.8 percent in 2017 and 1.8 percent for 2018 – from 2.3 percent previously.

Transplanted Canadian Governor Mark Carney said, “There is a clear case for stimulus, and stimulus now, in order to be there when the economy really needs it to have an effect…This is a timely, coherent and comprehensive package of measures. It is appropriately sized given the scale of the shock, the uncertainties about the degree of the adjustment and the relatively limited data”. While the economic effect remains unknown, the ‘shock and awe’ campaign certainly succeeded in clobbering the exchange rate – the pound fell almost three cents against the dollar in the minutes after the announcement, and has recovered only marginally over the past twenty-four hours.

The weight of Carney’s sledgehammer also managed to calm nerves across the financial markets, lifting global equity bourses by assuring participants that central banks still have the ammunition – and the willingness to use it in a crisis situation.

It’s summertime, and the money is (still) easy.

Have a great weekend!

Karl Schamotta

Head, Enterprise Risk

Follow @vsualst

 

Counterparties:

While you’re sipping Hennessy, here are some reading suggestions:

Bloomberg: Vanguard’s Gain Is Wall Street’s Pain as Billions Leave the Financial Industry

IMF: Testing Piketty’s Hypothesis on the Drivers of Income Inequality

Real Time Economics: The First, Forgotten Conspiracy Theory About the Unemployment Rate

The Diplomat: Higher Oil Prices Could Save Asia From Deflation

Bloomberg: The Canadian Housing Boom Fueled by China’s Billionaires

Vox: The Big Puzzle In Economics Today

Financial Post: Canada’s Economy Is Growing at the Slowest Pace In 60 Years

National Bureau of Economic Research: The Race Between Machine and Man

Brookings: The End of Coal-Fired Growth in China

Priceonomics: How the Hunt Brothers Cornered the Silver Market

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