Morning Train (9 to 5)
- Today’s US non-farm payrolls data will be hard to interpret because of hurricanes and strike in October.
- The U.K. bond market sell-off should ease. GBP will need to keep trading at a deep discount to fundamental equilibrium.
- Swiss inflation cools sharply in October. SNB on track to dial-up easing.
USD retraced some of this week’s losses, 10-year Treasury yields are trading in the middle of this week’s 4.20%-4.34% range, and the tech sector is dragging down the stock market. In our view, USD and Treasury yields can edge higher underpinned in part by strong U.S. economic activity. Today, the spotlight is on the U.S. October non-farm payrolls (12:30pm London) and ISM manufacturing index (2:00pm London).
Non-farm payrolls are expected to rise by 100k following an outstanding increase of 254k in September. This would be well below the average monthly gain of 203k over the prior twelve months. The unemployment rate is projected to remain at 4.1% on an unchanged participation rate of 62.7%. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.4% in September and remain at 4.0% y/y for a second consecutive month.
However, the jobs report will be hard to interpret as it will be affected by the two recent hurricanes and the strike at Boeing. Fed Governor Waller expects these factors to reduce employment growth by more than 100,000 in October, and there may be a small effect on the unemployment rate.
Meanwhile, the ISM manufacturing index is projected to rise to 47.6 vs. 47.2 in September. The regional Fed ISM manufacturing prints point to upside risk. Of note, the US S&P Global manufacturing PMI increased to a 2-month high at 47.8 from 47.3 in September.
The U.K. bond market sold-off sharply since Wednesday’s government Budget with yields on 10-year gilt surging as much as 33bps to a one-year high at 4.53%. The move higher in yields largely reflects and upward adjustment to U.K. rate expectations. 10-year inflation-adjusted gilt yields jumped by roughly 25bps to a high near 0.96% as the projected loosening in fiscal policy limits the Bank of England’s (BOE) scope to cut interest rates.
Concerns over the U.K.’s government plan to boost borrowing also contributed to higher gilt yields. The U.K. Office for Budget Responsibility said “overall borrowing between 2024-25 and 2028-29 is higher than the March forecast by £142.2 billion, an average of £28.4 billion a year. This represents one of the largest fiscal loosenings of any fiscal event in recent decades.” Still, the IMF endorsement of the Chancellor’s Budget should ease worries over fiscal profligacy. The IMF noted “we support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.”
GBP/USD stabilized around 1.2900 after plunging yesterday from a high of roughly 1.3000 to a low near 1.2844 due to the gilt sell-off. Normally, an upward reassessment to BOE rate expectations should be positive for GBP. But a higher for longer BOE policy rate risk derailing the modest recovery in U.K. economic activity and in turn undermine GBP and limit upside for U.K. bond yields.
Moreover, the U.K. runs a relatively large current account deficit (-3.2% of GDP in Q2). This means, GBP will need to keep trading at a deep discount to fundamental equilibrium (BBH-PPP estimates GBP/USD equilibrium at 1.5300) to attract foreign investors to absorb the additional gilt issuance planned in the coming years.
CHF plunged after inflation in Switzerland unexpectedly cools in October. Headline CPI fell to a 40-month low at 0.6% y/y (consensus: 0.8%) vs. 0.8% y/y in September and core CPI declined to 0.8% y/y (consensus: 1.0%) vs. 1.0% y/y in September. Inflation is tracking below the Swiss National Bank’s (SNB) Q4 forecast of 1.0% y/y, reinforcing the case for a 50bps SNB rate cut in December.
EUR/USD pared back some of this week’s gains and testing support at the 200-day moving average (1.0870). Stronger Eurozone Q3 real GDP growth and unexpectedly sticky core and services CPI inflation lifted bond yields in the Eurozone in favor of EUR. For instance, 10-year German bond yields rose as much as 19bps this week to a high of 2.44%, the highest since July 26. Nevertheless, the ECB has room to keep easing which limits EUR/USD relief rallies. The Eurozone disinflationary trend is intact, and the growth outlook is unimpressive.
China Caixin manufacturing PMI improved in October but remain indicative of sluggish economic growth. The manufacturing PMI rose to a two-month high at 50.3 vs. 49.3 in September. Chinese policymakers are expected to unveil the details of their fiscal stimulus pledge following the National People’s Congress Standing Committee meeting scheduled for November 4 to 8.
