US Dollar Advances after August Payrolls and Wages Place Federal Reserve Under Spotlight

-USD advances broadly after solid nonfarm payrolls, wages report.

-Economy adds 201k jobs, wages growth hits 9-year high in August.

-Data suggests inflation pressures are building, puts Fed in spotlight.

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The Dollar edged rose broadly Friday as traders responded to a better-than-expected nonfarm payrolls report for August, and a surprisingly strong set of wage numbers, while markets wait with baited breath to hear of whether President Donald Trump will go ahead with a second round of tariffs on a much larger portion of China's exports to the US. 

The US economy added 201,000 new jobs during the recent month, up from the downwardly-revised 147,000 seen back in July, when markets had looked for just 191,000. However, this still nudged the six-month rolling average of US jobs growth lower from 192,000 in July to 175,000 for August. 

A slowdown in the pace of US jobs growth was always going to become more likely the further the unemployment rate falls. And unemployment has fallen from steadily from 5% in late 2016 to a low of 3.8% in May. Although the jobless rate held at 3.9% in August when markets had looked for a decline back to 3.8%.

Meanwhile, and further on the upside, US wage packets grew by 0.4% last month when markets had looked for growth of just 0.2%. This pushed the annualised pace of wage growth up from 2.7% to 2.9%. This is a nine-year high for wage pressures.

"The standout figure was the 0.4% advance in average hourly earnings," says Katherine Judge, an economist at CIBC Capital Markets. "That justifies another rate hike this month and suggests that underlying inflation may be picking up slightly. However, we have seen wage growth pick up before, only to disappoint in later months and we are still not above the 3% pace that the Fed would like to see. Today's report should still be marginally positive for the USD and see yields rise slightly." 

The Pound-to-Dollar rate was 0.47% higher at 1.2985 after paring back a 0.57% gain and is down 3.8% in 2018, while the Euro-to-Dollar rate was 0.30% lower at 1.1584 after extending an earlier loss to trade 3.4% lower for 2018.

The US Dollar index was quoted 0.14% higher at 95.16 following the release after extending an earlier 0.4% gain and is now up 3.1% for the 2018 year.

"The wage growth number of 0.4% MoM is really powerful given statistical headwinds. There were two more working days in August than in July so if you are on a fixed salary this means that your hourly pay rate will effectively be lower in August than it was in July as pay is spread over more days. Significantly, there are only 19 working days in September so this technical quirk will reverse and could result in another good wage growth figure next month," says James Knightley, chief international economist at ING Group.

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Like Judge, ING's Knightley says Friday's wage data will encourage the Federal Reserve to push ahead with two more interest rate rises this year.

"The 201,000 rise in non-farm payrolls in August, which beat the consensus forecast of 190,000, will keep the pressure on the Fed to continue raising interest rates, particularly with wage growth reaching a nine-year high," says Andrew Hunter, a US economist at Capital Economics.

The Federal Reserve has raised interest rates seven times since the end of 2015 in order to keep inflation pressures at bay, with two increases so far in 2018. It is expected to raise rates again later in September and once more in December.

"I've tortured the data to show a relationship between unemployment and wages, but the uptrend in the latter is still too slow to scare the Fed. And when I look at NFP changes against the ISM employment indices, the latter have been recovering. No sign of US slowdown, empowering President Trump in his trade tactics, and keeping the Fed on its steady rate-hiking path. That's a recipe for continued stress in FX," says Kit Juckes, chief currency strategist at Societe Generale, in a note to clients before Friday's report.

Above: Societe Generale graph showing US employment-wage relationship. 

Friday's data follows closely behind the lapsing of a September 06 deadline for the submission of public comments on President Donald Trump's proposal to levy new tariffs on $200 billion of imports from China.

These tariffs will cover a far larger amount of Chinese exports to the US than the original $50 billion and have been billed as a potential watershed moment in the so called Trade war" between the world's two largest economies.

"It has become increasingly obvious in recent months those tariffs will be imposed. The only real question now is when it will happen," says Capital Economics' Hunter, in a note Wednesday.

The White House has come to blows with China this year over what it says is the country's failure to address concerns over "unfair trading practices" that include "forced technology transfer and intellectual property theft".

China has retaliated against the US tariffs with levies of its own, on $50 billion of US goods so far, and has threatened to target another $60 billion if the US goes ahead with the larger round of tariffs.

"The administration should announce a new round of tariffs after the public comment period ends this week although it is unclear how quickly that will happen or whether they will adopt a 10% or 25% tariff rate. Rhetoric and political considerations suggest little scope for meaningful conciliatory gestures on either side. The administration will be emboldened by resilient US markets and continuing strong growth," says Richard Franulovich, head of currency strategy at Westpac. 

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