Dollar Firm Ahead of Jobs Report

  • The rise in US rates remains the key driver for global markets
  • It’s clear that Fed officials still have the power to move markets between FOMC meetings
  • The highlight today will be the US jobs report
  • Canada will report September jobs data today too
  • Italy remains in focus as more details of the draft budget emerge
  • We are seeing a real EM positioning washout this week, with weak longs getting punished
  • Korea, Philippines, and Taiwan reported CPI overnight; Colombia reports CPI later today
  • Banco de Mexico delivered a hawkish hold yesterday; RBI delivered a dovish surprise

The dollar is mostly firmer against the majors ahead of the US jobs report. The yen and sterling are outperforming, while the Scandies are underperforming. EM currencies are mostly weaker. ZAR and RUB are outperforming, while THB and INR are underperforming. MSCI Asia Pacific was down 0.7%, with the Nikkei falling 0.8%. MSCI EM is down nearly 1% so far today, with China on holiday all week. Euro Stoxx 600 is down 0.6% near midday, while US futures are pointing to a higher open. The 10-year US yield is up 2 bp at 3.20%. Commodity prices are mostly higher, with Brent oil up 0.4%, copper down 0.5%, and gold up 0.2%.

The rise in US rates remains the key driver for global markets. After spiking to 3.23% yesterday, the US 10-year yield fell back but remains elevated just above 3.20%. So too is the 2-year yield, now trading at 2.88%. Bloomberg WIRP suggests a 76% chance of a December hike, which is at the highs. More importantly, markets are just starting to price in a potential third hike next year on the back of strong US data and hawkish Fed comments.

Indeed, after Powell’s comments late Wednesday, it’s clear that Fed officials still have the power to move markets between FOMC meetings. As our recent piece points out (Powell and Brainard Suggest Markets Underestimating Fed Hikes), recent Fed comments support our view that the markets are seriously underestimating the Fed’s intentions with regards to higher rates. Today, Kaplan and Bostic speak.

The highlight today will be the US jobs report. On Wednesday, ADP reported 230k new private sector jobs were created in September vs. 184k expected. In light of low weekly claims data for the survey week, strong ISM employment component, and high ADP estimate, markets are likely to have a whisper number for nonfarm payrolls that’s higher than the current 185k consensus. Average hourly earnings are seen slowing to 2.8% y/y from the cyclical peak of 2.9% in August.

Canada will report September jobs data today too. Consensus sees a gain of 25k jobs that partially offsets the -51.6k reading in August. Note that last month’s headline drop was misleading, as -92k part-time jobs masked a 40.4k gain in full-time jobs. September Ivey PMI was reported yesterday at 50.4 vs. 61.9 in August. Bank of Canada meets October 24 and is widely expected to hike rates 25 bp to 1.75% after the recent run of firm economic data.

CAD ran into stiff resistance near 1.28 and has since weakened as the greenback got more traction. USD/CAD has retraced nearly half of the September-October drop. However, a break of 1.2970 is needed to set up a test of the late September high near 1.3080. The near-term direction will most likely be dictated by today’s jobs data.

Italy remains in focus as more details of the draft budget emerge. We are getting conflicting press reports regarding the growth forecasts contained in the draft budget. The latest suggest that the government is targeting growth of 1.5% in 2019, 1.6% in 2020, and 1.4% in 2021, according to a senior official. Earlier in the week, Deputy Finance Minister Garaviglia said that the draft assumes 1.6% growth next year as well as the two years following.

Contrast that with IMF forecasts of 1.0% and 0.9% for 2019 and 2020, respectively. With global growth slowing, it’s hard to paint a picture where Italy is able to outperform to the extent that the draft budget assumes. The deficit assumption of -2.4% of GDP in 2019, -2.1% in 2020, and -1.8% are more optimistic than initial reports. That also means that these will most certainly be missed.

Germany reported strong August factory orders and PPI. Order rose 2.0% m/m vs. 0.8% expected, more than reversing July’s -0.9% reading. PPI rose 3.1% y/y, higher than the consensus 2.9% and up from 3.0% in July. After seeing a slight bounce yesterday, the euro remains heavy and is having trouble moving above the $1.15 area. With the dollar rally back on track, the euro is likely to test the August low near $1.13 in the coming days.

Irish Foreign Minister Coveney said a Brexit compromise is possible but that challenges remain. With the Irish border backstop being the major sticking point, his comments are noteworthy. Coveney also echoes press reports that EU officials are saying that a Brexit deal is “very close.” Sterling is up on the day, still trading above $1.30 after finding a toehold there yesterday. However, its recent gains have been modest and a break above $1.3110 is needed to help negate the recent drop.

Japan reported August household spending and cash earnings. The readings were mixed. Household spending jumped 2.8% y/y vs. 0.1% expected, but real cash earnings contracted -0.6% y/y vs. flat consensus. USD/JPY has been volatile this week, making a new cycle high near 114.55 before reversing and falling back below the 114 level. The pair is seeing some bids below the figure and so far, is flat on the day.

We are seeing a real EM positioning washout this week, with weak longs getting punished. Anyone lulled into jumping aboard the EM train is getting crushed by sharply higher US rates. The EM move is being led by ARS, but ZAR is also being sold off and has now retraced over half of the September rally. Break of 15.05 is needed to set up a test of the September 5 high near 15.70.

Of course, it’s not just about EM FX. MSCI EM fell nearly 2.5% yesterday and is off nearly another 1% today. It is about to test the cycle low just below 1000 from September 12. After that is the May 2017 low near 973 and then the April 2017 low near 951.

And take EM bonds. Please. The 10-year Turkey local currency yield rose 80 bp yesterday and is up another 50 bp today. South African and Russian bonds are also getting hit hard. Indeed, we expect EM local currency bonds to remain particularly vulnerable to the rise in UST yields.

Korea September CPI rose 1.9% y/y vs. 1.6% expected and 1.4% in August. Inflation is the highest since September 2017 and is nearing the 2% target range. Next policy meeting is October 18, and even though inflation has accelerated, we think a hike then is too soon. We see no change but expect a hawkish hold that sets up a potential hike at the November 30 meeting. A relatively stable won gives the BOK leeway to play it cautiously.

Philippines September CPI rose 6.7% y/y vs. 6.8% expected and 6.4% in August. Inflation is moving further above the 2-4% target range. The central bank just hiked rates 50 bp to 4.5%, but that was nearly wiped out by the spike in inflation. Next policy meeting is November 15, and another 50 bp hike seems likely if inflation accelerates in October.

Taiwan September CPI rose 1.7% y/y vs. 1.8% expected and 1.5% in August. While the central bank does not have an explicit inflation target, low price pressures led it to keep rates steady last week. Next quarterly meeting is in December and we think steady policy then is likely.

RBI delivered a dovish surprise and kept rates steady. While inflation remains well-behaved, most (including us) thought that the bank would hike 25 bp to help support the rupee. By not hiking, the RBI sent a bad signal to the markets and we expect further rupee underperformance.

Banco de Mexico delivered a hawkish hold yesterday. Rates were kept at 7.75%, though there was one dissent in favor of a 25 bp hike to 8.0%. The bank said it will “maintain or strengthen” its policy stance, adding that the balance of risks for inflation remains upwards. Recent peso weakness will raise some concerns, but not enough to warrant an immediate hike. The next meetings are November 15 and December 20, and what happens then will depend in large part on how the peso is trading.

Colombia September CPI is expected to rise 3.24% y/y vs. 3.10% in August. If so, inflation would remain in the upper half of the 2-4% target range. Last Friday, the central bank left rates steady at 4.25%, as expected. Minutes will be released today. The bank also announced the start of an FX buying program. Governor Echevarria said the program is not meant to target any particular FX level but added that he is very comfortable with the current rate around 3000.