U.S. wage growth re­mains the miss­ing in­gre­di­ent

Financial Mirror (Cyprus) - - FRONT PAGE -

In­vestors have prob­a­bly priced in a Septem­ber “ta­per” by the ECB, but the big ques­tion re­mains - will the Euro man­age to ex­tend gains from cur­rent lev­els, or will it be­gin a short-term cor­rec­tion? I be­lieve the an­swer lies in U.S. data this week. When look­ing at U.S. bonds be­hav­iour, spreads be­tween 2-year and 10-year trea­sury bonds have been shrink­ing since July 7 and are cur­rently stand­ing at 0.83 ba­sis points, which is not good news for the green­back. While the flat­ten­ing yield curve may be par­tially ex­plained by re­cent geopo­lit­i­cal ten­sions and a spike in eq­uity mar­ket volatil­ity, in­fla­tion ex­pec­ta­tions re­main the key con­trib­u­tor. If in­fla­tion ex­pec­ta­tions re­main low, the Fed will find it dif­fi­cult to tighten mon­e­tary pol­icy at the de­sired pace. That’s why U.S. wage growth is the most sig­nif­i­cant piece of data to watch on Fri­day.

The U.S. jobs re­port, due for re­lease on Fri­day, will likely show a slow­down in job cre­ation. Mar­kets ex­pect 180,000 jobs to be added to the U.S. econ­omy in Au­gust, ver­sus 209,000 in July and 231,000 in June. De­spite the ex­pected slow­down, the num­bers still look healthy.

The key fo­cus re­mains on wage growth; this has been dis­ap­point­ing, with lit­tle growth shown over the past two years and re­main­ing flat at 2.5% since April. Ex­pec­ta­tions are to see a 0.1% uptick for Au­gust, but for the yield curve to steepen and con­vince in­vestors of a third rate hike in De­cem­ber, we need to see wages ac­cel­er­at­ing fur­ther. be­tween the U.K. and the E.U. So far, there are no signs of progress and dif­fer­ing opin­ions of Brexit Sec­re­tary David Davis and his E.U. equiv­a­lent Michel Barnier sug­gest there’s a lot to be done to bring both sides into an agree­ment. Although the pound seems over­sold, it is likely to re­main un­der some pres­sure un­til pos­i­tive de­vel­op­ments ma­te­ri­alise. yield­ing as­sets, and en­cour­age in­vestors.

How­ever, I think U.S. pol­i­tics will play a sig­nif­i­cant role in gold’s next move. The debt ceil­ing and Nafta deal are amongst things to be watched closely. If gold gath­ers mo­men­tum and man­ages to close the week above $1,300, I be­lieve we’ll be see­ing an­other leg higher, with a po­ten­tial to test 2016 highs, around $1,375.

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