U.K. Jobs Data Cools Pound

Unemployment below 5%

Yesterday’s labour market report painted a picture of the U.K. economy continuing to confound those who predicted doom and gloom following the Brexit decision. It seems that with every positive report, “economic armageddon” gets pushed further into the future. The day of reckoning has been bounced between political decisions and economic releases and yet the economy still performs reasonably.

However, Sterling fell a little as wages growth was below market expectation, showing a little strain in the jobs market, despite a 4.8% unemployment rate

In days gone by employment falling by 37k and unemployment rate below 5% would have seen a positive reaction for Sterling, but times have changed. Greater liquidity has smoothed the road somewhat and major shifts caused by seismic events are characterised by flash crashes. Liquidity, it appears, is either plentiful or non-existent.

Without any data on the calendar today, traders await tomorrow’s retail sales numbers for the next steer on the U.K. economy and the Bank of England’s policy options.

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U.S. Data Supports Tightening Monetary Policy

Inflation and retail sales data released in the U.S. supported Fed. Chair Janet Yellen’s view of the economy and increased the likelihood of a rate hike sooner rather than later.

Consumer Prices had their biggest gain in four years, rising by 0.3%, and retail sales rose by a greater than expected 0.6%. The dollar remains firm, supported by expectation of widening interest rate differentials.

Mrs Yellen, in the second of her two testimonies to the Administration, reiterated her stance on interest rates. She faced a tougher time from members of the House of Representatives than she had the day before. The Republican dominated group has been critical of the Fed’s handling of the economy exhibiting a dislike for “unconventional policies”. Going forward the administration are likely to continue to second guess the FOMC and there have been calls for congressional audits of interest rate policy, a move being strongly resisted by Mrs. Yellen. She is up for re-election next January and it is unlikely that she will be re-elected since President Trump, who can name three additional members to the FOMC, was heavily critical of her performance during his election campaign.

Currency markets are a little uninspiring for traders at the moment characterised by periods of narrow ranges punctuated by violent moves (in either direction) as “Black Swan” events seem to be occurring more regularly. A black swan is “an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict”. The term was popularized by Nassim Nicholas Taleb, a finance professor, writer and former Wall Street trader. Black swan events are typically random and are unexpected. Before the discovery of Australia, it was “ fact” that all swans were white. The discovery of black swans characterises such an event perfectly.

Australian Employment Buoys Currency

Overnight, the Australian dollar traded at its highest level in three months, following a slightly better than expected employment report. Unemployment is fairly constant around 5.75% as the economy benefits from its long term relationship with China and short term strength of commodities. The Australian, New Zealand and Canadian dollars (the “commodity currencies”) have all recovered well over the past few months.

In Japan, the Yen is hemmed in by ultra easy monetary policy on the one hand and expectation of action over trade by the U.S. on the other.