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Outlook

Today’s US calendar includes the final PMI and the ISM services PMI, likely a small dip in each instance after record highs in May. The biggie will be tomorrow’s minutes of the last FOMC, which could confound analysts by displaying a lot less hawkishness than expected. Or maybe not. If true hawkishness is detected, why is the 10-year yield so low?

As noted above, Friday’s payrolls should have promoted the “ahead of the herd” mentality but instead the dollar got sold off. This was apparently not a shift in sentiment but last-minute position-paring. If we think there is something deeper going on, we have to say payrolls was not a good number, strange as that sounds. See the chart. Okay, payrolls rose 850,000, more than even the whisper number the day before and well above 583,000 the month before, but employment is still down by 6.8 million, or 4.4 percent, from its pre-pandemic level in February 2020.

Trading Economics notes “Labour shortages continue to weigh on capacity production as many companies struggle to hire employees as enhanced unemployment benefits, ongoing child care responsibilities and health concerns may discourage some workers to find a job. To cope with the absence of workers, companies raise wages and benefits. Average hourly earnings increased 0.3%, below forecasts of 0.4%. The average hourly wage is up to $30.40, although something named the “average hourly earnings of private-sector production and nonsupervisory employees rose by 10 cents to $25.68 in June.” And note that pay rises are concentrated in low-paying jobs–restaurant workers and retail. Manufacturing and construction lag. When they catch up, the labor shortage may cure itself. Some analysts speak of labor getting its own, finally, against capital getting it all. This is a bit ideological but not false.

Probably the important thing about lower-paid labor getting a comeuppance is that the Fed is watching. The Fed has said it wants to see less pay inequality, especially among women and minorities. This may slow down the tapering and first-hike talk. The Fed is counting on the market to fix disarray in labor markets in the form of pay raises, but that process has only just begun.

The market is clamoring for tapering, especially in the mortgage-backed, but the bigger picture is for more sitting-on-hands at the Fed. You have to wonder if the Jolts report tomorrow will come back as something the Fed watches; Yellen used to like it. But more than one analyst doubts the Jolts numbers are real. There’s a disconnect between what companies report on job openings and the next payrolls report. Openings were up one million to a new record high of 9.286 million in April 2021, easily beating market expectations of 8.3 million, and yet by June, actual payrolls were less one million.

Nobody is paying much attention, but G20 FinMins and central bankers meet this week, too. Lynne at Wall Street in Advance notes that ECB chief Lagarde will be front and center. There’s a sense that Lagarde is winning the age-old battle between the Austeres (Germany et al.) and the Growth-promoters (Southern tier).

If we dismiss the hiccough on Friday as a one-time, holiday-induced event, we should expect the dollar rally to continue. It’s a little odd that it’s so lop-sided–the benchmark euro is tame, while the commodity currencies are roaring and even more peculiar, sterling. Nobody can forecast news, of course, but potential triggers include things like the US Congress closing in on the infrastructure bills, OPEC getting a deal (or the US releasing inventory, although that’s not in keeping with how we think about Pres Biden), or some other Event that warrants an upper-case E.


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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