Dollar Firmer Ahead of Jobs Report

Dollar Firmer Ahead of Jobs Report

  • Consensus expectations for non-farm payrolls today is at 201K, according to the Bloomberg survey
  • Household spending in Japan came in much higher than expected in August
  • The dollar bloc continues to do well, with the Australian dollar helped overnight by supportive data
  • In the UK, construction PMI rose by far more than expected to 59.9 in September, from 57.3 previously
  • PBOC Deputy Governor Yi Gang suggested China should implement measures to deter FX speculation
  • The much awaited cabinet reshuffle in Brazil is expected to be announced today

Price action:  The dollar is mostly firmed against the majors ahead of the US jobs data.  The dollar bloc is outperforming, while the Norwegian krone and the euro are underperforming.  The euro is trading near its 200-day MA around $1.1170.  Sterling found some support from the firm UK construction PMI, and is trading back near $1.5150, while dollar/yen is still trading right above 120.  EM currencies are mostly softer.  IDR and PHP are outperforming while RUB and the CEE currencies are underperforming.  MSCI Asia Pacific rose 0.1%, with the Nikkei flat on the day.  China markets are closed until October 8.  The Dow Jones Euro Stoxx 600 is up 1.5% near midday, while S&P futures are pointing to a flat open.  The US 10-year yield is up 2 bp to 2.06%, while European bond markets are mostly softer.  Commodity prices are mostly lower, though oil prices are bucking that trend with modest gains. 

  • Consensus expectations for non-farm payrolls today is at 201K, according to the Bloomberg survey.  This would be a considerable uptick from last month’s 173K reading, but still below the year-to-date average of 212K.  On balance, a report broadly in line with expectations may see a headline reaction.  The most likely scenario is for participants to fade the initial move.  It is unlikely to change views about the Fed’s lift off.  Many are still wrestling with the weak manufacturing ISM (lowest since May 2013) and the downward revisions to Q3 GDP estimates spurred by flash merchandise trade report in the middle of the week.  The Atlanta Fed’s GDP Nowcasting slashed its Q3 tracking to 0.9% from 1.8%.  Many private sector economists cut their estimates toward 2.0% from around 2.5%.
  • We make four additional points about the jobs report.  First, the August time series (as well as the September one) is often subject to upward revisions to the first estimate.  Second, barring a significant surprise, those that expect the Fed to hike are largely concentrated in the December time-frame, not October.  Third, the unemployment rate of 5.1% is nearly identical to the level that prevailed when the Fed’s last tightening cycle began.  The broader measure that includes those who take part-time work because they cannot find full time work was nearer to 9.5% than August’s 10.3%.  Fourth, compelling evidence of reduced slack in the labor market comes from higher earnings.  The market expects a 0.2% rise in average hourly earnings in September.  This would match the average monthly increase in recent months, and lift the year-over-year rate to 2.4%, which would be the highest since August 2009.
  • Aside from the US jobs numbers, markets will also be focused on the speech by Fed Vice Chair Fischer, who will be speaking about monetary policy.  St. Louis Fed President Bullard will also speak today, but he is a non-voter.  We expect both to reinforce the view that the Fed is on track to hike rates this year, bar any unexpected developments.
  • Household spending in Japan came in much higher than expected in August, rising to 2.9% y/y against expectations for 0.3%.  This was the first positive print in three months.  However, the employment numbers were mixed.  The August jobless rate was a bit higher than expected at 3.4%, but the job-to-applicant ratio surprised on the upside at 1.23, the highest level since January 1992.  This follows a softer Tankan survey yesterday.  On balance, however, the recent data is unlikely to be enough to make a difference in the BOJ’s reaction function.  As such, we continue to think that some observers have got ahead of themselves by calling for imminent action by the BOJ.
  • The dollar bloc continues to do well, with the Australian dollar helped overnight by supportive data.  Australia new home sales rose by 2.3% m/m in August vs. -1.8% the previous month, while retail sales bounced back as expected to rise 0.4% m/m, continuing the string of good data.  This will help consolidate the view that there is hardly any chance of a cut next week by the RBA.
  • In the UK, construction PMI rose by far more than expected to 59.9 in September, from 57.3 previously.  The surprise was largely driven by the residential building component, which rose to 62.1 from 59.0.  Sterling snapped a 9-day losing streak yesterday but is still holding below $1.52.  On the euro cross, the pair is testing support in the 0.7360 area, but 0.7330 needs to give way to confirm near-term top.
  • The much awaited cabinet reshuffle in Brazil is expected to be announced today.  As we previously noted, it will likely include major concessions by President Rousseff in order to shore up support from its coalition partner, the PMDB, to get fiscal measure approved and to avoid the impeachment process.  We see this as a positive development for Brazilian assets, at least for the short term.  Separately, August IP will be reported and is expected to contract -9.5% y/y vs. -8.9% in July.  The weak economy is likely to keep upward pressure on the budget deficit.
  • China markets are closed until October 8.  However, PBOC Deputy Governor Yi Gang made the news with an article suggesting China should implement measures to deter FX speculation.  According to an article he wrote for China Finance magazine, these measures could include a tax on FX trades (the so-called Tobin Tax) as well as “handling” fees to counter short-term capital flows that aim for arbitrage opportunities.  These sorts of measures have become more acceptable to the IMF, as EM nations have struggled with huge short-term capital flows.
  • Korea reported August current account data and September CPI.  Inflation for August surprised on the downside, falling -0.2% m/m and coming in at 0.6% y/y.  This is well below the 2.5-3.5% target range.  The next BOK meeting is October 15 and recent data certainly increase the odds of cut.  Still, at this point we suspect the bank will prefer to see the reaction from the first Fed hike before pulling the trigger.  Separately, the current account balance fell to about $8.5 bln in August from a revised $9.3 bln in July.  The won and the Kospi are underperforming on the day, but the moves have been relatively modest.