US data may fail to impress - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the next big market event will be the US payrolls report this week and the Fed comments in recent week and at Jackson Hole have resumed intense focus on this report. 

Key Quotes

“It is far from clear that this report will be strong enough to make the case for a 21 September hike.  Recent US economy data have been mixed.

Last week, several regional manufacturing surveys were softer and the Markit preliminary USA PMI was down from 52.9 to 52.1 in August, below 52.6 expected.  The Markit services PMI was only 50.9 in August, down from 51.4 in July.

Durable goods orders were modestly firmer than expected. Underlying core capital goods orders rose for a second month in a row in July (up 1.6%m/m after rising 0.5%m/m in June).  However, they are still around the weakest level since 2011, and thus do not yet show enough recent strength to much support the case for a Fed hike.

The Michigan Consumer survey of long term inflation expectations were revised down to 2.5%, equaling the record low seen several times since October last year.  This concurs with the most recent reading in the New York Federal Reserve forecast of three-year ahead inflation expectations that fell back to 2.5% in July, revisiting lows in Q1 this year.  Market-based measures of inflation expectations have been stable since mid-year, but are still near their lows. As such, low inflation expectations remain a restraint of Fed policy tightening.

This week kicks off with the PCE deflator on Monday; the Fed’s main inflation gauge.  Fed members have argued the core is near 1.6% at the moment, gradually on a path to make it to 2% over two years.  The market is expecting core PCE to slip to 1.5%y/y in July.

On Thursday the ISM manufacturing survey is released, based on recent regional and Markit data this may be unimpressive and is forecast by the median economist to dip from 52.6 to 52.0.

Payrolls are due on Friday and are expected to rise 180K, unemployment is forecast to fall from 4.9% to 4.8%.

We see a risk that payrolls loses momentum again after two months of strong outcomes. This would be consistent with a weaker PMI employment components that averaged 50.4 for the manufacturing and non-manufacturing indices in July.”