Just as the market was getting excited about the pick-up in the US labour market and the wave of spending this could unleash on the economy, gas prices throw a spanner in the works ...
The chart below shows annual earnings growth (white line) and average gas prices in the US (orange line).The chart is normalised and shows how the two move together. As you can see, since November gas prices have crossed above earnings growth for the first time in 3 years.
Annualised earnings growth (white line) and gasoline prices (orange line) - normalised.
This gap between wages and gas prices has widened considerably since January and with US oil prices up at $108 per barrel gas prices are likely to remain elevated or even rise further for some time to come.
The fact that gas prices are outpacing wage growth is significant as it will 1, eat into consumers' disposable incomes and 2, increase companies' cost base thus forcing them to look for savings elsewhere - such as wages.
Job creation is only one aspect of the labour market recovery. For now, we crucially haven't seen wages pick up in any meaningful way. Added to this, not all Fed members are happy with the improvement in the labour market. New York Fed President Dudley - arguably the second most important member of the Fed - said that the Bank is still "pretty far away" from its full employment mandate during a speech in Puerto Rico on Friday afternoon.
This is why we believe the Fed may be committed to 1, completing QE2 and 2, keeping rates low for a prolonged period.
There is no denying that the boost to payrolls is a positive for risk assets as the US economic outlook brightens and this may well be enough to sustain a further leg higher in risky assets. However, once the dust settles the spotlight may fall on lacklustre wage growth in the US, which could weigh on Treasury yields. 2-year Treasury yields have come off after failing to break through the 0.8% level - the level that proved too hard to beat back in February.
If yields don't break convincingly above the 0.8% mark we think that USDJPY in particular will find it hard to keep momentum going and rise towards 85.00 and beyond. Good support levels include: 83.50 - 200-day moving average then towards 82.50. We think this pair is likely to remain range bound for the coming weeks, at least until all of the component parts are in place for a healthy labour market recovery.
PLEASE NOTE THESE ARE BLOOMBERG PRICES AND DO NOT REPRESENT PRICES OFFERED BY FOREX.COM
Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: email@example.com| w: www.forex.com/uk
23 College Hill | 3rd Floor | London EC4R 2RT
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.
Most Popular Slideshows
- IN PHOTOS! A Picture of Sadness in Kristen Stewart as Robert Pattinson Celebrates 27th Birthday ALONE? [SLIDESHOW]
- Jaden Smith Clarifies Emancipation Reports with Dad Will Smith on TV Show ‘Ellen’ [PHOTOS AND VIDEO]
- Selena's Bikini Body: How to Get the Toned Look in Two Easy Steps [PHOTOS & VIDEO]
- 'Fifty Shades of Grey' Movie Casting: Chris Evans as Christian Grey [PHOTOS]