What are we to believe in the latest US jobs data?
‘The 98,000 rise in non-farm payrolls in March was well below the 180,000 increase economists had been expecting’
Markets may have become more sceptical about the capacity of the Trump administration to deliver on its economic and fiscal policies in the short term but seem resolved to continue to see the glass of asset prices as half-full and not half-empty. The US dollar is a beneficiary of that.
The reaction to Friday’s US non-farm payroll data (NFP) is a case in point. The 98,000 rise in non-farm payrolls in March was well below the 180,000 increase economists had been expecting, yet the Dow Jones Industrial Average only closed down 0.03 per cent on the day and the US dollar retained its poise.
Investors chose instead to focus on the drop in the US unemployment rate to 4.5 per cent and on the fact that snow storm Stella had had a decidedly negative impact on US job hiring last month, even though markets didn’t look through the fact that clement weather in previous months had given payrolls a boost.
But perhaps investors, at least when it comes to equity markets, if not the currency markets, are less preoccupied by backward looking hard data, such as Friday’s payrolls number, and more focused on forward looking soft or sentiment data, such as purchasing managers’ surveys.
Written before Friday’s US jobs data, US firm Goldman Sachs had already argued on April 6 that “soft data tend to be more important drivers of equity market performance than hard data”.
On April 5 HSBC noted that “the divergence between surprises in hard data and soft data has split opinion in the market. Some believe that because the soft data are forward-looking, they will simply lead the hard data… others worry that perhaps the soft data may simply be a flash in the pan”, perhaps just reflecting “animal spirits which have simply gone too far”.
To be fair, HSBC was looking at the issue across markets as a whole while Goldman’s focus was orientated towards equities, but HSBC does make a persuasive argument that a run of good soft data could lead markets to price in excessive expectations for future hard data which, when those expectations are disappointed, provoke a negative market reaction.
Indeed, HSBC argues “even on those occasions where better-than-expected soft data genuinely presage a pick-up in the hard data, expectations have been raised so aggressively that the improved hard data still end up being worse than expected”.
If HSBC is correct, the US equity market might need more than just good soft data to keep it buoyed up.
As regards the currency markets, HSBC feels its argument is illustrated by the fact that the US dollar sold off initially after the Fed raised rates in March even though the US central bank had matched market expectations. HSBC’s logic is solid but intriguingly the narrative in currency markets may suggest an even more nuanced approach.
For example, as in the US, soft data in the euro zone has been encouraging but the euro itself remains pretty unloved against other major currencies.
Any notions that decent soft data in the euro zone can underpin the attractiveness of the euro have to contend with the harsh reality that the European Central Bank (ECB) continues to have a negative 0.4 per cent deposit rate. Investors need a lot of persuading when they have to pay for the privilege of holding the euro.
It’s arguably a similar case with the Japanese yen.
Friday’s payroll data might have triggered a kneejerk sell-off in the US dollar’s value versus the yen but it was quickly reversed. The disappointing hard US data couldn’t give the yen more than a fleeting bounce.
Markets cannot ignore the fact that Japan too still has a negative official interest rate, and that there is speculation that, in 2018, current Bank of Japan Governor Haruhiko Kuroda, the architect of the Japanese central bank’s present monetary policy settings, may be reappointed for a second five-year term.
But what of the Chinese yuan, a currency which in 2017 has so far fared well against the greenback?
A Reuters poll of nearly 60 forex strategists, taken last week, sees the dollar/yuan exchange rate weakening to 7.05 to the greenback in six months and to 7.10 in a year’s time, with the prospect of further Fed tightening a key consideration. The analysts see the yuan holding steady at its current level of around 6.90 to the dollar for the next month.
All in all, whatever the kind of data, investors don’t seem quite ready yet to give up on the dollar.