Macroeconomic update: Fed faces a difficult choice

• NFP stuns with a print of just +20k but wage pressure grows
• Some better news from Europe
• Ugly trade data from China

Higher wage growth may force the Fed to raise rates despite slowing economy

We are not that surprised with a very low increase in employment as we suggested in the market alert earlier this week that after two strong months (January and December) and “off” month was very likely. What it shows is that employment continues to grow in a range of 150-200k monthly on average and that’s good enough. What is more of a concern is rising wages – 3.4% growth is something that may worry the Fed and have the central bank at least consider one more hike. This would take place despite global slowdown that – together with less accommodative US policy – will have an effect in some kind of US slowdown as well. Consequences for the dollar are mixed but stocks unsurprisingly tanked on such report.

This is now the largest pullback this year on US500 with bears eyeing the 2680 support. Source: xStation5

Industrial output up in Europe but is this a breakthrough?

This has not been a good week for the euro as the ECB admitted the slowdown and dashed any hopes for higher rates in a foreseeable future. But ironically on the data front we got some positives. PMI for the services sector has been revised upwards for February from 52.3 to 52.8 pts. and way above the 51.2 from January. Furthermore industrial output in few countries (especially Spain) surprised to the upside. However in this case we are still cautious.

Macroeconomic reports have been finally (a bit) better for Europe this week. Source: Macrobond, XTB Research

January could be a one-off as auto manufacturers did a re-stocking and PMI for February brought a further deterioration. So while the data has been supportive, it’s too early to call a recovery in the euro area.

Massive drop in the Chinese exports

Trade data in China has been absolutely ugly in February as the surplus declined from $39.2 billion to $4.1 billion but even more worryingly exports were at -20.7% y/y (+9.1% y/y in January). Yes the Lunar New Year has disturbed the reporting but still situation seems to be showing a strong deterioration of economic conditions confirmed by the services PMI declining from 53.6 to 51.1 points. Although the Chinese authorities outlined some stimulus, we think the size in not significant enough to prevent further slowdown.      

Chinese stocks were soaring on trade hopes but they could face a reality check caused by the economic situation. Source: xStation5