Daily Brief – Wobbly Warsh Wager

Wobbly Warsh Wager

As we wrote yesterday, Friday’s non-farm payrolls (NFP) data held quite the surprise in store. Not only was the August reading approximately triple the consensus estimate but revisions to previous forecasts meant that July’s unexpected job losses (23,000) were all-but revised away. With another day and a half of trading under our belt following the publication, there’s a new question to answer: with employment central to the Fed’s mandate, why couldn’t the Dollar hold onto the bid received immediately following the release of NFP data?

There are two emerging camps on this subject: Trump’s rhetoric following the publication versus an emerging structural Dollar weakness narrative. As it’s far more entertaining, let’s unpack the former first.

Immediately after the NFP data, Trump posted:

‘LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT’.

Where to start. At the very least Trump’s threat should be read as a demand to the US Fed to lower rates. That’s not new but it is destructive to USD value as we know the Dollar suffers when the government tries to capture and influence monetary policy. However, we can read this with a less sanguine lens. Trump’s threat can easily be read as a unilateral White House weapon to force the Fed’s hand to cut rates.

There is a logic behind Trump’s threats – the President views trade deficits as losses funded by capital account surpluses. By constricting trade flows and strangling that capital surplus the economy cools, meanwhile the Dollar would likely continue to be restrictive to growth. Under this environment the Fed is likely to need to cut rates anyway. Trump’s commentary following the NFP event could easily therefore have taken the sting out of the publication and even sent the Dollar into reverse.

The other argument of why immensely strong NFP data didn’t manage to drag the Dollar higher is a story of structural weakness. Due to the unprecedented measures from the US Treasury and its forthcoming bond-buying operations some analysts still believe that inflation is of ever greater than usual importance to today’s Fed than the labour market. Through this lens, with the unemployment rate proving sticky around 4.1%, just 100,000 extra jobs created in the month of August is not seen as enough to push the Dollar higher.

Discussion and Analysis by Charles Porter

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