Market News & Insights
4 May 2018

Wagering on Further Hikes

The US dollar continued its push higher in yesterday’s trading session, edging closer to its YTD lows against its major pairs. The rise in the dollar saw US stocks come under pressure with the S&P 500 declining 0.23% and the Nasdaq dropping 0.23%. This rally however has taken a breather ahead of today’s job report, where the Non-Farm Payroll figure is expected to show job gains of 190K, with the unemployment rate expected to fall back further from 4.1% to 4%. The key figure however will most likely be the wage growth figure with expectations of an unchanged reading from last month of 2.7%. Similar to many of its major central bank counterparties, the US has struggled to hits its wage growth target even with unemployment falling. The Japanese economy is an excellent example of this with unemployment at 2.5%, yet no sign of an uptick in wage growth, meaning they are still way off their inflation target of 2%. With most central bankers of the opinion that lower unemployment results in higher wages and therefore higher inflation. Today’s figures should be taken as a whole and not just solely the headline NFP. With markets taking the Fed’s latest minutes as slightly less hawkish than anticipated, good figures all-round in today’s figures could get investors whetting their appetite for an additional hike, taking it to 4 for the year, something which I feel would be very optimistic.

The euro has come under a little pressure this week on declining expectations on when the ECB will look to end its bond buying program. We mentioned earlier this week that Draghi hadn’t been as buoyant of late, and after yesterday’s latest inflation numbers, which saw an unexpected decline on both the headline rate as well as on core prices, there looks to be cause for this. Core prices in particular remain increasingly weak falling back to 0.7%, just above the lowest level since 2008. We had Services PMI out already this morning from the euro area, where again the figure missed analysts’ expectations, hitting its lowest level of the year at 54.7. We will need a revival in Q2 from the Eurozone if we are to see an end of QE this year.

In the UK, where already we have been getting some poll results in from the local elections. Usually this would be considered a non-event, with all that’s happening on the political front in the UK, markets are using it to gauge public opinion. Early results show no signs of a Tories collapse, with all major parties seeming to be picking off UKIP. Elsewhere the NIESR cut its 2018 growth forecast to 1.4% from a February estimate of 1.8%, after official figures showed the economy grew just 0.1% in the first quarter.