NFP Day; Japan Leadership Change

September 03, 2021

Biden’s stimulus plan could be on pause
Japanese PM Suga announced that he would not run in the LDP leadership
The debate over ECB’s next step continues
Turkish inflation surprised on the upside

Markets are predictably quiet ahead of today’s U.S. payrolls data. The dollar is mixed in narrow moves. The Aussie is outperforming, perhaps in part boosted by a deal with the UK to secure four million doses of Pfizer. European equities and U.S. futures are a touch higher, but the Nikkei rose 2% on the prospect of a new prime minister (see below). Yields are a little changed across G10. In the commodity space, oil is hovering around $70 a barrel as the U.S. Gulf Coast grapples with the impact of hurricane Ida while gold was largely unchanged.

AMERICAS

There’s a new layer of uncertainty thrown over Biden’s $3.5 bln stimulus plan. Reports yesterday confirmed that it will be an uphill battle for approval of the plan, in what’s being dubbed a “strategic pause.” Much of the discussion is pivoting around Democratic Senator Joe Manchin from West Virginia, who could tip the balance for the vote in the Senate. Of course, there is still plenty of political manoeuvring ahead, and the plan is by no means dead, but it seems like another setback for Biden in the making.

Bostic, from the Atlantic Fed, stuck to the usual line of a wait-and-see approach. In his words, “we’re not going to be pre-emptive,” invoking the new average inflation targeting framework. We suspect the Fed will be dancing around the issue of how to evaluate “substantial further progress” for some time, but this is nothing new. Recent numbers suggest we are not too far off, but this morning’s NFP will be an essential data point in this regard.

There was not a lot to say about the Jobless claims print yesterday. The employment picture still looks relatively favorable (so far) despite the delta variant worries. Initial claims fell from 354K to 340K, a bit below expectations. Separately, factory orders for July came in a tad above expectations at 0.8%. Regarding today’s jobs numbers, consensus currently sees 725k jobs added vs. 943k in July, while the unemployment rate is expected to fall two ticks to 5.2%.

EUROPE / MIDDLE EAST / AFRICA

The debate over the next ECB move continues to heat up after the higher CPI and PPI numbers earlier this week. It’s still unclear how most MPC members will view the rising price pressure, how temporary or headline-driven they are. The odds of the ECB reducing the Pandemic Emergency Purchase Programme (PEPP) are rising, and even a small tweak here could pacify the hawks such as Knot and Holzmann. We assume this is not priced in –certainly not fully priced – so it would lead to another leg higher in the euro if materialized. While 5-year, 5-year breakeven rates have been trending higher, the move in the back end of euro area sovereign curves has been in line with the global trend.

Turkey’s August CPI came in considerably higher than expected at 19.25% y/y. Now the central bank finds itself in the familiar spot of being torn between the appropriate policy response (tightening) and political pressure from President Erdogan’s calls for easing. It’s now even more evident that the tightening cycle should have continued, and the weaker lira is only compounding the inflation outlook. Still, it’s entirely possible that the next policy move will be a cut, and Turkish asses remain out of favor for the foreseeable future. The lira is down 0.5%, underperforming most EM currencies.

ASIA

Japanese PM Suga announced that he would not run in the LDP leadership race and effectively resigned from his post. This changes the landscape for the Liberal Democratic Party (LDP) elections at the end of the month, which will effectively determine the next PM. The front runner seems to be Foreign Minister Fumio Kishida, but the country’s vaccination chief, Taro Kono, will also be a contender. General elections will take place at the end of November and, despite weaker opinion polls, the LDP coalition will probably win again. Markets seemed to like the prospect, with the Nikkei rallying 2% on an otherwise quiet day and extending the strong rally that started in August.

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