European Currencies Retreat on Good U.S. Jobs Report, Though Wages Remain Weak

 | Aug 04, 2017 | 9:18 AM EDT
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The euro edged down around 0.2% versus the dollar immediately after the release of stronger-than-expected U.S. nonfarm payrolls data for July. The British pound was also weaker, losing around 0.4% to the dollar after the data hit the tape. Both currencies already were trading lower for the day.

The stronger-than-anticipated employment number, at 209,000 new jobs versus expectations of 180,000,  and low unemployment rate of 4.3% point convincingly enough to another Fed interest rate hike coming sooner rather than later. But wage growth was mediocre. Average hourly earnings inched up 0.3% in July from June, a little bit higher than June's 0.2% pace of growth. Year on year, they were up 2.5%, the same as in June.

Falling unemployment accompanied by anemic wage recovery is a feature of the European economy, too. Data from Eurostat show that in June, unemployment in the euro area fell to its lowest level since February 2009, when the financial crisis was at its height.

Eurozone unemployment was 9.1% in June, down from 9.2% in May and a full percentage point lower than in June 2016. However, wage growth was sluggish. There are no data available for June, but the most recent figures, those for the first quarter, showed wage growth of just 1.4% year on year in the first quarter of the year, slower than the 1.6% seen in the fourth quarter of 2016.

In the U.K., the Bank of England cut its outlook for wage growth for 2018 and 2019, with Governor Mark Carney saying on Thursday, Aug. 3, that companies were keeping a lid on pay rises because of uncertainty over the Brexit negotiations.

"There's an element of Brexit uncertainty that's affecting the wage bargaining. Some firms, a material number of firms, are less willing to give bigger pay rises as it's not as clear what their market access is going to be over the next few years," Carney said.

This practice is spilling over into the public sector -- something the Bank of England should be well aware of, as it faced the first employee strike in 50 years.

"Real income growth, real income levels in real terms, on average is still below where it was in 2007-08 and that's driven by the private sector," Carney added. "In that context, for a variety of reasons, it's understandable that there's public sector wage restraint."

In Japan, workers had a bad surprise: Real wages actually fell by 0.8% year on year in June. Not even the expected meager increase of 0.1% materialized. This is the first decline in real wages in Japan since March, with analysts saying it was caused by a fall in overtime and reflects weak bonuses. The Japanese media wrote that summer bonuses in the country were set to post their first decrease in five years.

The issue of weak wage growth is problematic, not only because it means consumption cannot properly take off but also because price inflation will remain weak. And if inflation is weak, it is much harder for households, corporations and governments to dig themselves out of the mountain of debt under which they are buried.

Interest rates may remain low everywhere for a while still. The bears predicting a bond bubble burst may need to wait.

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