Financial market research and analysis

Politics continued to drive trading overnight, pulling Wall Street and Asian markets lower. Whilst political fears receded in Italy with the formation and approval of a populist coalition government, these were quickly replaced by ramped up trade war fears. The Trump administration placing tariffs on steel and aluminium imports for its closest allies hit sentiment pulling the Dow over 1% lower.

The expected tit for tat response from the EU, Mexico and Canada is setting the scene for a trade war, which is not conducive to global growth. However, the losses have not been as large as we would have expected just a few months ago. The market is becoming more familiar with this administrations’ negotiating tactics and as a result, rather than seeing a move straight into risk off trading, we are seeing some investors take a wait and see approach. The traditional safe haven Japanese yen moved lower versus the dollar, as did gold and European bourses are pointing to a stronger start on the open.

NFP to boost the dollar?

After such a strong influence from politics on trading over the past few days, investors will be relieved to have the focus switch back to economic data, with the release of the US non-farm payroll figures. A solid report is expected and if delivered could cement expectations for a rate hike in June when the Fed meets in less than two weeks.

188k jobs are expected to have been created in May, up from April’s disappointing 164k. Meanwhile, unemployment rate is expected to remain steady at a multi decade low of 3.9%.

Consistent with previous reports the wage growth figure is expected to be a central focus of today’s NFP report and is expected to show an increase of 2.8% year on year, up from 2.6% in April. Whilst concerns over low inflation in the US have eased slightly over recent weeks, soft earnings growth continues to be an enigma for the Fed amid a tightening labour market. The theory that a tighter labour market leads to workers being able to demand higher wages hasn’t played out to the extent that the Fed has been expecting. Given that higher wages point to higher inflation down the road, its clear why the Fed and the markets are so focused on the earnings element of the report.

It would take a seriously disappointing report to prevent the Fed from hiking in June, a move which is 85% priced into the market. Traders will pay more attention to what might be coming up in the second half of the year. Talks of 3 more hikes across 2018 have all but disappeared, but the prospect of 2 more is still up for debate. A strong reading today would support the argument for two more hikes, lifting the dollar whilst pushing GBP/USD back towards $1.32.

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