U.S. wage growth remains the missing ingredient
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.