US: Solid labour market data - SocGen

US labour market data was solid but unspectacular and that may be enough to trigger a much-needed easing in some over-stretched USD positions, according to Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“US GDP growth is running at 2.1% y/y. July non-farm payrolls grew by 1.49% y/y, and thanks to a longer workweek, aggregate hours worked increased by 2%, and that’s the figure which correlates most closely with GDP. The lack of productivity growth remains as frustrating as ever, but is unlikely to change quickly. On trundles the US economy, set fair for 2% growth or so for a while longer.”

“Meanwhile, the unemployment rate fell to 4.3% and average hourly earnings GROWTH came in at 2.5%. That was a tick above expectations but doesn’t do anything to support the notion that falling unemployment boosts wage growth. I’ve added a longer-term chart that shows non-farm employment as a percentage of the civilian non-institutional population merely to show a slightly better picture. It doesn’t magically reinvigorate the Phillips Curve, but it does support the notion that the unemployment rate is a poor measure of labour market slack.”

“The Fed remains on track to start shrinking its balance sheet after the summer, to go on raising rates slowly (we still expect another move in December) and to get them to a peak level between 2% and 2.5%. 10year nominal yields may be stuck in a 2.2-2.4% range for a while. 10year real yields are in a 0.3-0.7% range and they still do a good job of correlating with FX moves (not much cause to buy volatility, then).”

“Or at least they did, until the euro embarked on its latest rally. Stephanie tells me that DXY has bounced off a descending channel limit, that should take it to 93.80 (0.5% above here) and if it breaks that, the next hurdle is at 95.20. But relative real yields suggest that while we ‘ought;’ to still be in 2017s gradual downtrend, fair value at the moment might be as high as 98/99.”