The dollar has jumped in the wake of Friday’s Non-farm Payrolls report. However what has really changed, and is this a move that can be sustained by the dollar? US CPI inflation will be key. We look at what the key factors to watch out for this week and the outlook for forex, equities and commodities markets with a technical analysis of the major instruments.
Inflation, or the lack thereof, seems to be the FOMC’s big conundrum. The Fed is tightening monetary policy, that much is for sure, however there are question marks over the speed of the tightening. Throughout 2017 the FOMC dot plots and speakers have been suggesting that there will be three hikes this year. However, all the while, inflation has been steadily falling. US economic data suggests that growth continues to trudge along at an unspectacular pace. However, the consistent failure for inflation to be moving towards the Fed’s 2% target will be increasing the doubt in the minds of the FOMC that they are doing the right thing in pushing ahead. On Friday we saw average hourly earnings staying at +2.5% for the year. Although Bloomberg TV ran with the line that the labor market was taking off, I have to sceptically disagree. This payrolls report simply increases the nagging doubt in the minds of the Fed that the Phillips Curve is struggling to justify its existence. With productivity so low, jobs creation seen primarily at the lower end of the wage spectrum, arguments that automation of jobs may just have changed the paradigm to an extent that the Phillips Curve (i.e. Unemployment and wage growth are inversely correlated) no longer applies. The market reacted with marginal dollar strength but this is likely to be short lived. Focus will turn to US CPI on Friday but for now nothing really changes with Friday’s payrolls.