Australian dollar hammered as US jobs power on

See the latest Australian dollar analysis here:

Macro Afternoon

DXY jumped Friday night as EUR and CNY fell:

The Australian dollar was hammered:

Gold too:

Oil was strong:

Metals were not:

Big miners were butchered:

EM stocks fell:

Junk too:

Treasuries were dumped:

Bunds bid:

Aussie bonds bashed:

Stocks fell but hung on:

The mover was US jobs which came in strong again ( all charts from Calculated Risk):

Total nonfarm payroll employment increased by 224,000 in June, and the unemployment rate was little changed at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in professional and business services, in health care, and in transportation and warehousing.

…The change in total nonfarm payroll employment for April was revised down from +224,000 to +216,000, and the change for May was revised down from +75,000 to +72,000. With these revisions, employment gains in April and May combined were 11,000 less than previously reported.
…In June, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $27.90, following a 9-cent gain in May. Over the past 12 months, average hourly earnings have increased by 3.1 percent.

Headline was good:

Jobs growth has slowed but remains strong:

The UE rate lifted marginally:

Shadow slack is still apparent:

Wage growth eased but remains decent:

Another Goldilocks report. The probability that the Fed will cut more than twice collapsed near zero:

Seems about right. The Fed definitely only in the frame for one or two “insurance cuts” now. That’s a big pressure release for Aussie dollar bears.

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  1. – This could be the very ultimate end of the 38 year bull market in (US) T-bonds. And this could be the beginning of rising (long term) US interest rates. And the rising USD is THE sign of a reversal in the trend of US interest interest rates. To be continued …………………
    – I DO expect the FED to cut the FED’s fund rate because the FED, RBA, etc. are Always following the 3 month T-bil rate.

  2. DominicMEMBER

    Just look at that wage growth. The trend is pretty clear. Inflation red flags beginning to pop up with increasing regularity.

    Oh what fun it’s going to be for monetary policy makers when confronted with rising inflation (unexpectedly, of course. Whocouldanode?).

    And that multi decade bull market in both bonds AND stocks ….. tick, tock

    • Dominic, how can you be bullish on gold if you are worried about rising inflation?

      The Fed would be raising rates and not cutting them under your scenario.

      • DominicMEMBER

        Gold is always a winner in inflationary environments but this one in particular:
        1. The key to gold outperforming is what is happening to ‘real’ rates i.e. nominal less inflation. If real rates are rising it is negative for gold and vice versa
        2. When CBs start raising rates in response to inflation concerns they are always, with few exceptions, behind the curve i.e. real rates are falling.
        3. $250 trillion of global debt tells you that CBs couldn’t raise rates even if they wanted to. When inflation arrives central banks will have their hands tied. Paul Volcker ran cash rates up to 20% to defeat inflation in the early ‘80s. Can you imagine the RBA pushing cash rates up to even 5% without decimating the economy? Lol

    • – Contrary to common perception rising interest rates is actually EXTREMELY DEFLATIONARY.

      • DominicMEMBER

        Well, yes, to the extent that rising rates are deployed to counteract rising inflation ..

        My point is that rate raising cycles have a tendency to lag inflation. It’s extremely rare that CBs are ahead of the curve.

    • – Rising interest rates is, contrary to common perception, extremely DEFLATIONARY. Especially when wages don’t up too much or stay flat.
      – Central banks will start to cut rates or (to put it another way) follow short term rates lower.

    • – Inflation is NOT the driver behind interest rates.
      – Every man and his dog point to the 1970s but even in that decade this story falls flat on his face. In the 1970s the DEM/USD exchange rate kept rising. It meant that US inflation was much higher than in Germany. But in spite if that rising DEM/USD german interest rates went up at an only slightly lower pace than US interest rates. The difference between the two interest rates can’r be explained by the rising DEM/USD.
      – In the timeframe 2000-2008 we saw that the price of oil went up sevenfold (in USD) (=massive inflation) from $ 20 in 2001 up to over $ 140 in mid 2008. Yet US interest rates kept falling from about 6.5% in the year 2000 down to about 4.5% in mid 2008 when oil was over $ 140. So, what do you mean inflation/deflation drives interest rates ?
      – When oil prices kept risng in 2007 & the 1st half of 2008 the FED kept cutting rates. And I thought central banks were supposed to raise rates when inflation is raging ?
      – I am sorry but your (austrian school ??) logic is “upside down”. Currently I am short gold !!!

      • DominicMEMBER

        I don’t mean to be rude but I’m not entirely sure what you’re getting at. However, I do understand the very last sentence about you being “short gold”.

        I sincerely hope for your sake that it is only a short-term position because ‘long gold’ is likely to be one of the most profitable trades of the next decade – it has simply got to be one of the best macro plays I can think of in a long long time. Highly volatile, but a home run if managed properly.

    • – It’s quite simple. These examples show that inflation doesn’t drive interest rates.
      – Agree. Being “long gold” is certainly going to be a very profitable position in the future but NOT NOW. Deflation will rear its ugly head (again) and then one has to be “short gold” (again).

    • – It depends also what kind of economic environment we will be in after the deflation (=rising interest rates) has run its course. Then it could also be very profitable to be “long” gold mining companies.
      – Rising interest rates are VERY DEFLATIONARY because it will reduce the (nominal) value of credit (e.g. US & Australian T-bonds).

      • DominicMEMBER

        I see where the mix-up has occurred.

        There is no doubt that rising rates will be deflationary for most (perhaps ALL) risk assets: stocks, bonds etc.

        But they won’t necessarily be deflationary for consumer goods ie. food, utilities, healthcare etc.

        That’s my position and it’s also why we’ll almost certainly never see rising rates again — policymakers must protect the ‘value’ of risk assets at all costs (including property).

        The interesting thing will be to see whether, in the event of inflation in the CPI, whether policymakers dare raise rates ..

    • – To be more precise: Gold does well in an environment with REAL interest rates are Negative or becoming MORE negative. In that regard, rising interest rates will put downward pressure on gold.

      • DominicMEMBER

        Correct about REAL interest rates being inversely correlated with gold, but trust me, with $250 trillion of REAL global debt to service you won’t see real interest rates rise meaningfully again in your lifetime — they will be getting much more negative from here. I hear what you’re saying about the bond bull market being over but the monetary response to that will be to print all the money needed to sit on the curve and keep both long and short rates zero or even negative. In other words when the rates cycle turns you will be very close to the bitter end of the fiat money system.

        The bottom line is, if rates were allowed to rise even marginally the entire financial system (and economy) would get smoked.

    • – But this assumes that Central Banks are able to control interest rates – both short term & long term – which they can’t. And that’s something A LOT OF people fail to wrap our head around.
      – Just look at Italy, Greece, Spain etc. during the financial crisis in Southern Europe. In those years the Euro did not budge meaningfully but yet interest rates in those countries rose very significantly. So, REAL interest rates rose very significantly as well.
      – Just imagine what would happen to our (aussie) dollar when all our foreign creditors would pull their money out of our country. Rising (REAL) interest rates, anyone ?

      • It doesn’t matter – the result is the same either way:
        1. Rising rates cause (asset) deflation leading to the bankruptcy of the financial system and a new financial system, or
        2. CBs print huge amounts of money to prevent higher rates across the curve eventually destroying the currency they’re printing. leading to a new financial system.

        There is no solution here – simply a choice as to how we arrive at the end, which at this point is baked in the cake.

  3. Anyone talking about rising US inflation is an idiot.
    No offence to anyone who believes inflation is on the rise in the US.