Payrolls add 252,000 jobs but wages fall by most in near 9 years

• Unemployment falls to 5.6% in US, lowest since 2008, but wages slip

• The decision around rate increases now relies on lower natural rate of unemployment

• European Court of Justice ruling on unlimited OMT purchases due Wednesday

• Data calendar quiet for the day ahead of UK CPI tomorrow

Good morning,

Friday’s US labour market report had something for everyone who has an opinion on when the Federal Reserve should be raising interest rates. 252,000 jobs were added in the US in the month of December, capping the best year for job creation in the US since the late 90s. These gains also helped the unemployment rate fall to 5.6%, the lowest level since June 2008. That was enough for the policy hawks - who are looking for tighter monetary policy and higher rates - to increase bets that the Fed will raise rates at some point this summer.

Unfortunately, there is one key differential of labour market strength that we haven’t mentioned yet - wages. Average hourly earnings dropped by 0.2% in December - the single largest fall since 2006 - and obviously this sits in direct contrast with thoughts of tightening labour market. What this symbolises is that the natural rate of unemployment in the United States is a lot lower than people originally thought. It was previously believed that this equilibrium existed at around 6% unemployment, but given the falls below that level and that lack of wage inflation then the economy has some way to go.

The celebrity bond fund manager Bill Gross was on TV in the minutes after the announcement and stated that ‘wage earnings growth was not enough to sustain growth’. I would also add to that that growth in the US economy is also too weak at the moment to sustain the imported disinflation from China and the Eurozone.

It seems that the majority of the market agreed with these thoughts and just held up their bullishness on rate increases in the short term with some interest rate futures now pointing towards September as the most likely month that the lever is pulled. Dollar has lost a bit of ground in the aftermath, something that will come as a relief to most currencies given its start to the year. Profit taking on USD pairs is unlikely to last in my opinion as traders continue to react to data from elsewhere that only increases the attraction of holding ever more US dollars.

Tomorrow’s CPI release from the UK is the highlight for sterling and will likely signal a collapse in December, propagated by the declines in oil markets and the flow of disinflation from elsewhere in the global economy. Of course, with lower inflation and the inherent lack of an extreme need to hike interest rates for other reasons, the likelihood of tightening monetary policy in the UK is slim. The election battle also hangs in the background like a spectre for sterling bulls. The opinion polls released over the weekend have changed little as we open up this morning.

The main event of the week will be the European Court of Justice ruling around the European Central Bank’s unlimited bond buying plan that is due on Wednesday. We can expect few issues from this ruling, though it may delay the imposition of a full-throated stimulus plan that the Eurozone needs. Then again, the Greek elections are likely to also do the same and we still believe that the ECB will dip its toes on Jan 22nd, possibly disappointing those looking for the kitchen sink to be thrown at the problem. Euro is slightly higher on the session as a result.

The data calendar is dead as the proverbial dodo today and we expect sideways trade as a result.

Have a great day.