- September jobs report will be the highlight; labor market data yesterday came in firm; Fed officials are fully in data dependent mode; Canada highlight will also be September jobs data
- The ECB hawks are clearly outnumbered now; German reported firm August factory orders; Italy reported soft August retail sales; U.K Labour Party will holds its annual conference this weekend in Liverpool
- Japan reported soft August cash earnings; weak wage growth supports the BOJ’s cautious approach; RBA released its Financial Stability Review; India kept rates steady at 6.5%, as expected
The dollar is trading flat in quiet trading ahead of the jobs report. DXY is trading flat near 106.311 after two straight down days. Ahead of the data, DXY is clinging to a small 0.1% weekly gain. If sustained, it would mean an astounding twelve straight weeks of gains. The euro is trading higher near $1.0560 while sterling is trading higher near $1.2215. USD/JPY is trading higher near 149 as weak wage data suggests the BOJ will not remove accommodation anytime soon (see below). Without a shift in monetary policy divergences, we believe the pair will resume its climb. Like last week’s correction, we believe this week’s dollar weakness is also corrective in nature. Looking beyond the potential intervention noise, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended. Today’s jobs data will be very important for the dollar’s near-term direction.
AMERICAS
September jobs report will be the highlight. Bloomberg consensus stands at 170k vs. 187k in August but its whisper number stands at 190k. The unemployment rate is expected to fall a tick to 3.7% while average hourly earnings are expected to remain steady at 4.3% y/y. We note that the unemployment rate rose in August due to an unexpected 736k jump in the labor force, which we view as an outlier that will likely correct in September. If so, we could get a downside surprise in the unemployment rate. August consumer credit will also be reported and is expected at $11.7 bln vs. $10.399 bln in July.
Labor market data yesterday came in firm. Both September Challenger job cuts and weekly jobless claims suggest the labor market remains tight. Initial claims came in 207k vs. 210k expected and a revised 205k (was 204k) last week. The 4-week moving average for initial claims fell to 209k vs. 211k last week and is the lowest since early February. Recall that NFP that month came in at 311k vs. 225k expected. Continuing claims came in at 1.664 mln vs. 1.671 mln expected and a revised 1.665 mln (was 1.670 mln) last week.
Elsewhere, Challenger job cuts fell. Announced cuts fell to 47,457 vs. 75,151 in August, a number that was boosted by strikes. Challenger noted that job cuts totaled 146,305 in Q3, down 22% from Q2. Of note, companies announced plans to fill 552,800 seasonal positions in September, up 54% from the same month last year.
Fed officials are fully in data dependent mode. Daly said “If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work.” She added that “Importantly, even if we hold rates where they are today, policy will grow increasingly restrictive as inflation and inflation expectations fall. So, holding rates steady is an active policy action.” Elsewhere, Barkin said “We have time to see if we’ve done enough or whether there’s more work to do. The path forward depends on whether we can convince ourselves inflationary pressures are behind us or whether we see them persistent. And I’ll be watching the labor market closely for those signals.” Odds of a hike November 1 stand near 25% and move higher to almost 40% December 13. We believe those odds are too low but re-pricing will hinge crucially on today’s jobs report. Waller speaks today.
Canada highlight will also be September jobs data. Consensus sees 20.0k jobs added vs. 39.9k in August, while the unemployment rate is seen rising a tick to 5.6% due to an expected rise in the participation rate. If so, the unemployment rate would be at a new high for this cycle and compares to the 4.9% trough from June 2022. Bank of Canada tightening expectations remain elevated as recent data have come in firm. WIRP suggests 30% odds of a hike October 25, rising to nearly 50% December and topping out near 65% in January.
EUROPE/MIDDLE EAST/AFRICA
The ECB hawks are clearly outnumbered now. Schnabel said “I still see upside risks to inflation. Such risks need to be monitored carefully. If they materialized, further interest rate hikes could be necessary at some point.” On the other hand, Villeroy said “Today, I think there’s no justification for an additional increase in the ECB rates. There’s a lot of debate about the peak in rates: instead we should now talk of a plateau, and we’ll remain on this plateau as long as necessary.” Villeroy now represents ECB consensus, whereas earlier this year, Schnabel’s view held sway. This is borne out by WIRP, which suggests no odds of a hike for as far as the eye can see. The first cut is now seen coming June 6 rather than July 18 previously. Knot, Vasle, Vujcic, and Kazimir all speak later today. The ECB releases the account of its September meeting next Thursday and will be scoured for clues.
German reported firm August factory orders. Orders came in at 3.9% m/m vs. 1.5% expected and a revised -11.3% (was -11.7%) in July. The y/y rate improved to -4.2% vs. -7.9% expected and a revised -10.1% (was -10.5%) in July. Simply put, it’s hard for us to get excited about this bounce in orders as we view it as unsustainable. IP will be reported next Monday and is expected at -0.3% m/m vs. -0.8% in July.
Italy reported soft August retail sales. Sales came in at -0.4% m/m vs. 0.0% expected and 0.4% in July. The y/y rate slowed to 2.4% vs. a revised 2.8% (was 2.7%) in July. Italy and Spain held up relatively well during the H1 but recent readings suggest they too are slipping into recession along with Germany and France. Indeed, ongoing complaints from senior Italian officials about tight ECB policy suggest the economy is really feeling the pinch, with little relief in sight.
U.K Labour Party will holds its annual conference this weekend in Liverpool. Labour leader Keir Starmer goes in holding a strong hand after Labour handily won a by-election in a Glasgow suburb that was previously held by the Scottish National Party. Labour won with 58.6% of the vote, a gain of 24.1 percentage points from the previous election, while SNP came in second with 27.6% of the vote. It’s worth noting that Labour won only 1 of 59 seats in Scotland in the 2019 elections vs. 48 for the SNP. The huge swing is obviously good news for Labour if it can be replicated in other key races in general elections expected next year.
ASIA
Japan reported soft August cash earnings. Nominal earnings came in at 1.1% vs. 1.5% expected and 1.1% in July, while real earnings came in at -2.5% y/y vs. -2.1% expected and -2.7% in July. Household spending was also reported -2.5% y/y vs. -3.9% expected and -5.0% in July. Real earnings have fallen y/y every months since April 2022. Until real wage growth turns positive, we expect consumption to remain weak. Yesterday, Prime Minister Kishida promised unions that recent wage increases would be made sustainable but so far, there has been little evidence of that.
Weak wage growth supports the Bank of Japan’s cautious approach. Many bank officials want to see stronger wage growth before removing accommodation and is one of the signs they look for in terms of meeting the sustainable 2% inflation target. BOJ liftoff expectations have been pushed out compared to the start of this week, with WIRP now suggesting no odds October 31, 15% December 19, 50% January 23, 75% March 19, and fully priced in for April 26.
Reserve Bank of Australia released its Financial Stability Review. The bank warned that “A small but rising share of borrowers are on the cusp, or in early stages of financial stress,” noting that the share of borrowers falling behind on mortgage payments has “begun to pick up from a low level.” The bank said that around half the mortgage loans with rates taken out during the pandemic have already rolled off into higher rates since the RBA began hiking in May 2022, adding that most borrowers have managed the transition well. Lastly, the RBA stressed that “Overall, Australian banks are in a strong positions to raise provisions and absorb loan losses if economic conditions worsen more than expected. The very low share of borrowers in negative equity on their loans further protect banks against credit losses.” Of note, WIRP suggests 10% odds of one last hike November 7, rising modestly to top out near 55% in Q1.
Reserve Bank of India kept rates steady at 6.5%, as expected. However, it was hawkish hold as Governor Das warned of inflation risks from excess liquidity in the system and said the RBI was considering selling bonds in order to soak up that extra cash. He said “I would like to emphatically reiterate that our inflation target is 4% and not 2-6%. Our aim is to align inflation to the target on a durable basis, while supporting growth.” His comments suggest that the RBI may be moving away from rate hikes to limit inflation in favor of tightening overall system liquidity. That said, the swaps market is pricing in steady rates over the next three months, followed by some risks of a hike over the subsequent three months. No easing is priced in over the next three years, which seems overly hawkish.
