Job growth hints at Fed's rate hike this autumn

(MENAFN- Khaleej Times) There is no doubt now that the US central bank's dual mandate has hit its limit. The 255,000 job growth in July (and the upward revision of June payrolls to 292,000) has increased the likelihood of a Federal Reserve rate hike sometime this autumn. This is the primary reason the US Dollar Index reversed prior declines and surged to 96.50 with the euro pressured down to 1.1050. The positive surprise in the US jobs data leaves the "data dependent" Yellen Fed no choice but to increase the overnight borrowing rate at least twice in 2016. The July data lends a new, ominous significance to the Fed's FOMC statement that "near term risks to the economic outlook" have diminished. Yellen had done her best to avert premature rate hikes due to the Chinese yuan devaluation in January, the shock May payrolls slump and the Brexit debacle on June 23. I reiterate my belief that the euro will depreciate to 1.08 by December.

The Bank of England's first base rate cut since 2009, coupled with the restart of a 60 billion gilt purchase program, 10 billion corporate debt purchase and bank term funding program all vindicates Governor Mark Carney's pre-Brexit warnings. The UK PMI manufacturing data fell a shocking four points in July to 48.2 and the shock to consumer confidence justifies the epic monetary stimulus. It is also significant that Theresa May not only sacked Chancellor Osborne but also reneged on his pledge to balance the budget by 2020. This is seriously bad news for the British pound. My analysis on the 2008 and 1992 sterling devaluations suggests cable could fall as low as 1.15.

Rate cuts, fiscal stimulus, bank term funding, the loss of Britain's AAA credit rating, an epic plunge in gilt yields, forward guidance, PMI data and positioning all meant that sterling was a short at the top of its post Brexit 1.28-1.33 range. As President Reagan liked to say, you aint seen nothing yet! Threadneedle Street has opted for "shock and awe" quantitative easing that could eviscerate the sterling bulls as badly as did the Brexit vote.

The June and July payroll data mean at least two per cent growth in the US driven by robust consumer spending. The higher US dollar and slower Chinese growth will pressure global factory orders and manufacturing, yet this is not sufficient to negate Fed tightening. At 4.8 per cent, the US is at de facto full employment while average hourly earnings have begun to rise above two per cent. This does not mean that the Federal Reserve will move on September 21 but another blowout, above consensus August payrolls could change the Fed's calculus. The jobs data also virtually guarantees that Hilary Clinton will win the White House in November. The next milestone for the Fed is the Jackson Hole conclave of global central bankers. At the very least, Yellen will be forced to abandon her "dovish stance".

The rise of the Japanese yen from 120 to 100 was one of the most consistent currency trends of 2016. In essence, Planet Forex is unimpressed by both the Bank of Japan's monetary stimulus and the structural reforms of Abenomics. Above all, there is no prospect of "helicopter money" to ignite Marounuchi. The financial markets no longer believe Japan can achieve its two per cent inflation target - and this means US payrolls related yen selling to 102-103 is temporary. The Japanese yen will once again retest 100 - and head higher to 98!

The strong US non-farm payroll data has killed the gold uptrend - and spot gold has now lost $40 an ounce from its recent $1375 peak. However, the 2016 gold bull market is not dead as long as the Federal Reserve refuses to aggressively raise interest rates. Gold will probably trade in a $1,320-$1,360 range until the Jackson Hole meetings.

The Indian Goods and Services Tax (GST) is the most significant economic reform enacted since the end of the License Raj in 1991. While long term rupee positive since it will encourage FDI and narrow the current account deficit, there is a short term GST hit to consumption and growth. A more hawkish Fed could lead the Indian rupee (INR) lower to 70 this autumn.