Payrolls in the USA have been growing the slowest since 2018. (Afternoon analysis 10.01.2020)

The dollar fluctuates after the publication of the report on the US labour market. Both the data on the number of new payrolls and wage growth in the USA fell below the expectations. The zloty is stable and shows the potential to strengthen its position against the main currencies.

In the afternoon, the most important macroeconomic publication of the week, i.e. the December report on the US labour market was published.

Slow growth in new payrolls and wages

The most important data from the report failed to meet market expectations. The non-farm sector recorded an increase in employment by 145k, i.e. 15k below expectations, as well as below the Wednesday ADP institute reading. The November data were also revised downward by 9k. This is not a very weak result, but looking deeper into the data, we see that the industrial sector continued to be under pressure.

In the manufacturing sector, a decrease of 12k payrolls was recorded in December, and in the whole 2019, there was an increase of only 46k new jobs, compared to an increase of 264k a year earlier. This is a result not only of the global economic slowdown but also of a US customs conflict with China. This dispute continues to put pressure on the sector, which is also reflected in the ISM indexes. However, more than in the case of the employment data, the wage data have failed. The pace of average hourly wage growth increased by 2.9% on an annual basis (and only 0.1% on a monthly basis), which was 0.2 percentage points below market expectations, and the slowest growth since September 2018.

The data in the report are somewhat below expectations, but fundamentally nothing changes. Lower wage growth suggests that inflationary pressure is lower, i.e., the Federal Reserve is maintaining lower interest rates for longer. An increase in employment of about 150k is still a good result, although today's data support the equity market more than the dollar.

The dollar reacted negatively in direct response. The EUR/USD exchange rate rose from about 1.1090 to 1.1130, but this movement was reversed in the next half hour. The report probably does not give much potential for the dollar to grow. It may increase the supply pressure on the US currency in the following days. However, further reports from the labour market will be important for the market, which will give an answer to the question of whether the slowdown in wage growth was a one-time event. In a slightly closer perspective, there will also be readings of inflation from the US (one already next week). These will be the main focus of market attention. However, geopolitical risks may keep the dollar at relatively high levels in the short term in the context of recent days.

Zloty's basket is stable

The report's impact on the US labour market, especially in the context of wages, is positive for emerging countries' currencies, including the zloty. Much depends on the dollar's behaviour, including the EUR/USD exchange rate, in the coming hours, but market positioning may shift to the next week. However, data from the USA indicate that the probability of a stronger appreciation has decreased. The zloty's basket remained stable after the publication of the report from the USA. However, if the dollar weakens and the EUR/USD exchange rate rises later in the day, the Polish currency may gain slightly in relation to current levels, i.e. EUR/PLN about 4.24, USD/PLN a little below 3.83, CHF/PLN about 3.92 and GBP/PLN about 5.00.

Next week's preview

The opening of the week may be interesting and may contribute to the increase in exchange rate fluctuations. On Tuesday, reading of the Consumer Inflation Index (CPI) in the US in December will be published. Unlike PCE, it is not the Federal Reserve's preferred measure of inflation, but it may indicate to investors the direction and scale of the price processes in the economy. In particular, after a surprisingly low rate of wage growth in the December US labour market report, which may suggest lower price pressure. The median of market expectations indicates that CPI core inflation (excluding energy and food prices) will remain at 2.3% per year. Deviations from this level may introduce a lot of volatility in dollar quotations.

The rest of the week can be equally exciting. On Wednesday we will find out how industrial production in the eurozone has changed in November. Individual data from the largest economies in the region exceeded expectations, which may suggest a solid aggregate reading for the entire euro area and slightly strengthen the common currency. The signing of the first phase of the US-China agreement in Washington is also scheduled for Wednesday. Larry Kudlow, Director of the National Economic Council, told Bloomberg TV on Friday that a fact sheet on the agreement will also be published, which may increase market volatility (although the final impact on the dollar should be limited).

On Thursday, data on US retail sales will be released - another important indicator for the US economy. However, these data do not include the services sector, so they are not a fully direct reflection of US consumer behaviour.

On Friday morning, a set of data from the Chinese economy will be published. The December readings will be released, among others, on retail sales, industrial production, investment in fixed assets, as well as on GDP growth in the Q4. In all cases, stabilization is expected, as has also been indicated by previous publications (e.g. PMI). Even before the start of the session in Europe, we may witness an increase in market volatility if the data deviate from the consensus.

On Friday afternoon, important information from the US will flow in, first about industrial production in December and a little later about consumer sentiment in January. Production in December is unlikely to come as a surprise with strong growth (today we learned about a 14k drop in employment in the sector), and the consensus of economists indicates no change. Consumer confidence, according to the University of Michigan index, should remain around current, relatively high levels. It will be supported by the first phase of the US-China agreement as well as records on the equity market. This rather indicates a stabilization of the dollar at the end of the week (excluding unexpected geopolitical events). However, if the indicators are not in line with expectations, the US currency may fluctuate slightly more.