Dollar Firmer Ahead of Jobs Report

  • The US dollar is going into the monthly jobs report with a bid. 
  • Fed officials indicated that a rate hike was likely next month unless the economy disappointed; that’s not a high bar for the October jobs report
  • The consensus for Canada’s jobs report is for a net gain of 10k jobs, which would match the three- and six-month averages
  • Officials said that China will lift a freeze on IPOs by the end of the year
  • Chile and Brazil inflation came in slightly higher than expected

Price action:  The dollar is mostly stronger against the majors ahead of the US jobs data.  The Norwegian krone and the Aussie are outperforming, with the former helped by strong IP data.  Sterling and the Loonie are underperforming.  UK data was mixed, but sterling is still reeling after the BOE meeting yesterday.  The euro is trading flat near $1.0880, while sterling is trading lower near $1.5130, the lowest since October 6.  Dollar/yen is trading higher, but still unable to break above 122.  EM currencies are mostly softer.  THB and IDR are outperforming, while TRY, RUB, and ZAR are underperforming.  MSCI Asia Pacific fell 0.2%, with the Nikkei up 0.8%.  China markets were higher, with the Shanghai Composite up 1.9% and the Shenzen Composite up 2.8%.  After markets closed, Chinese officials said that IPOs will restart by year-end.  The Dow Jones Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat near 2.22%, while European bond markets are mostly firmer.  The 2-year US-German differential is now at 115 bp, the highest since 2006.  Commodity prices are mostly higher, with oil up about 1%.

  • The US dollar is going into the monthly jobs report with a bid.  There are two main considerations.  First, many speculators had given up on the strong dollar story.  This was evident in the positioning in the futures market, and the numerous articles in the business press arguing the dollar bull market was over.  Second, the divergence story has reemerged.  It is not, as some have argued, all about the ECB.  Clearly, the second largest decline of sterling in H2 15 took place on Thursday in response to a more dovish than expected BOE.
  • Both Yellen and Dudley indicated that a rate hike next month was likely unless the economy disappointed.  That does not seem like such a high bar for the October jobs report.  The Bloomberg consensus sees a net increase of 185k jobs.  The consensus also calls for the unemployment (U-3) rate to dip to 5.0%, and the underemployment (U-6) rate to slip below 10% of the first time since mid-2008.  Hourly earnings are expected to have risen by 0.2%, which translates into a 2.3% year-over-year rate.  Not spectacular, but at the upper end of its 3-year range.
  • The 185k consensus forecast compares with the two-month average of 139k.  The six-month average is 199k, and the 12-month average is 229.  We note that the government sector is adding jobs at a quickening pace.  The three-month average is 29k jobs, whereas the six-month average is 20k and the 12-month average is 12k.
  • The ADP estimate, weekly jobless claims, and the ISM services employment index have failed to confirm the weakness seen in the August and September jobs reports.  Still, the takeaway is that job growth may be slowing, but just not as quickly as the August and September reports seem to suggest.  The revisions will prove interesting in their own right.
  • If there is no significant surprise, the market appears to have already made the adjustment to the increased prospects of the Fed’s lift-off in December.  Technically, the dollar has approached key areas against the euro (~$1.08) and yen (~JPY122).  Unless one is convinced of a near-term break, the risk-reward might not favor extending dollar exposure on a largely as expected report.   Can the pendulum swing much further in favor of a hike without a new increase in investors’ information set?
  • Canada reports its jobs data at the same time as the US.  The consensus looks for a net gain of 10k jobs, which would match the three- and six-month averages.  However, Canada has lost full-time positions in two of the past three months for a total loss of full-time positions of about 25k.  The IVEY PMI survey showed an unexpected decline (to 53.1 from 53.7) and the September trade figures showed the first decline in imports in five months, which is a potential sign of weakness in the domestic economy.
  • The Canadian dollar has been the best-performing major currency against the US dollar since the Bank of Canada met on October 21, losing only 0.15%.  The two-year interest rate differential between the US and Canada has widened to 20 bp from just below 3 bp in the middle of last month.  Oil prices just had the largest two-day decline in three weeks amid news of the sixth weekly increase in US inventories.  These two factors tend to be associated with a weak Canadian dollar.  The US dollar is the middle of a CAD1.30-1.33 range.
  • A weak Canadian jobs report, which may include a tick down in the participation rate, could see increased speculation of another rate cut.  The implied yield on the March 2016 BA futures has risen by 40 bp since late August and by 18 bp since the BOC meeting.  The risk now lies in the other direction.
  • Germany reported a much weaker September IP print at -1.1% m/m vs. +0.5% consensus.  This comes after weaker than expected factory orders (-1.7% m/m vs. +1.0% consensus) data yesterday.  While this bears watching, we note that other indicators suggest the Eurozone recovery continues, which warns of markets getting overly complacent about the ECB announcing more stimulus in December.
  • Elsewhere, Norway reported September manufacturing IP at 0.9% m/m vs. flat consensus reading.  The Norges Bank was less dovish than expected at yesterday’s meeting, with a rate cut not discussed at all.  However, we believe further easing is on the table, and will hinge on the upcoming data.
  • The UK reported September manufacturing production at 0.8% m/m vs. 0.6% consensus.  Industrial production, also released today, came in a bit below expectations at 1.1% y/y.  The UK also reported September trade, and the deficit came in a bit better than expected at £9.4 bln.  But the main driving force behind sterling’s weakness was yesterday’s comments by the BOE which appeared to be less hawkish than expected.
  • During the North American session, the US also reports September consumer credit.  The Fed’s Bullard and Brainard speak today, while Williams will speak Saturday.  Canada reports October jobs data too, with consensus headline gain at 10k vs. 12.1k in September.  However, the mix will be important.  The September reading saw weakness masked by a 74k gain in part-time jobs, which offset the enormous -61.9k drop in the more important full-time jobs.
  • Officials said that China will lift a freeze on IPOs by the end of the year, suggesting confidence that the equity market rebound is firmly on track.  IPOs were suspended back in July.  China Securities Regulatory Commission official said new IPOs will resume after improvements are made to the listing system. Since the announcement was made after China markets were closed, we will have to wait until Monday to see how they absorb the possibility of added supply.  Before the news, they had built on recent gains, with the Shanghai Composite up 1.9% and the Shenzen Composite up 2.8%.
  • Chile reported October CPI at 4.0% y/y vs. 3.9% consensus and down from 4.6% in September.  It has not been within the 2-4% target range since March 2014, but the drop helps explain why the central bank considered leaving rates steady at its October meeting.  In the end, the bank decided to start the tightening cycle then with a 25 bp hike to 3.25%, but the falling inflation trajectory supports our view that the tightening cycle is not going to be aggressive.
  • Brazil reported October IPCA inflation at 9.93% y/y vs. 9.91% consensus and 9.49% in September.  Despite inflation moving further above the 2.5-6.5% target range, COPOM minutes suggest rates will remain on hold for the time being.  The next meeting is November 25.