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The Federal Reserve will certainly not be happy with the August U.S. jobs report. Employment grew less than expected and at the same time there were strong wage increases. This suggests that inflationary pressures are not as transitory as the Fed hopes. The U.S. dollar immediately went into a sell-off, while U.S. yields rose – the reverse of the usual correlation.
Other risk assets performed mixed. Commodity prices rose to a new five-year high, and the prices of emerging market currencies were dragged down with them. Again, this suggests that inflationary pressures are not easing. Stock prices had a much tougher time, being dragged down by the gloomy jobs report. The U.S. dollar fell against all major currencies last week, making it the clear loser.
Now that the holiday period is over, attention shifts to the September meetings of the major central banks. The ECB will kick off on Tuesday and the Fed will follow in a few weeks. The latest macroeconomic news, especially in the US, sounds remarkably 'stagflationary'. As a result, the reaction of policymakers is very difficult to predict. At the very least, we expect a spirited discussion within the ECB's Governing Council, although it is not yet clear whether the consensus has yet been reached to start tapering monthly PEPP government bond purchases. Below are the main currencies in detail.
The flash inflation report from the eurozone was also an unpleasant surprise. Both the headline and the headline figure were found to have risen sharply, and these increases can only be partly explained by one-off factors. It seems that the ECB, like the Federal Reserve, will have to deal with the persistence of inflationary pressures while labour markets have not yet reached their pre-Covid levels. In this week's meeting, the positions will ultimately have to be weighed against each other. We expect at least the first signs of serious divisions within the Council to be seen – which could be positive for the single currency.
The figures from the UK indicate that the economic recovery there is continuing steadily. Markets expect July's GDP, which will be released this week, to be very good. However, the Bank of England is also faced with the global dilemma of strong inflationary pressures despite the relative slack in the labour market. We think the market is too dovish with its expectation that UK will curtail government bond purchases and raise yields, and look forward to the MPC's September meeting, which we believe could trigger a rally in the British pound.
There was clearly a whiff of stagflation in the U.S. jobs report: the number of new jobs was disappointingly small and wages rose sharply. The latter is generally welcome, but it should be noted that these increases still lag behind most measures of inflation. In real terms, wages have fallen across the board so far. As with the ECB, we expect the debate to intensify at the Fed, as there is increasing uncertainty about whether additional monetary stimulus is good or harmful in these circumstances. In any case, the fact that the US dollar is falling while yields are rising is easier to explain in the context of stagflation.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
Ebury makes international markets more accessible with tailored foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
- Financial services normally reserved for large multinationals
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