Dollar Firms Ahead of US Jobs Data

Dollar Firms Ahead of US Jobs Data

  • ECB President Draghi has set the table for further euro weakness
  • US nonfarm payrolls report is the main event today
  • Canada will also report August jobs data, as well as Ivey PMI
  • Colombia central bank releases minutes

Price action:  The dollar is mostly firmer against the majors ahead of the US jobs report.  The dollar bloc is underperforming, while the yen is outperforming.  The euro has recovered slightly from yesterday’s post-ECB sell-off, trading around $1.1135.  Sterling is trading near $1.5230, a marginal new low for this move and the lowest level since early June.  Dollar/yen is back below 120 and trading near 119, while Aussie made a new cycle low near .6950 before recovering a bit.  EM currencies are broadly weaker with RUB, TWD, TRY, and ZAR underperforming.  CZK and PHP are outperforming on the day.  MSCI Asia Pacific was down 1%, with the Nikkei shedding 2.2%.  Chinese markets remain closed until Monday.  Euro Stoxx 600 is down 1.7% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 4 bp to 2.12%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, with oil prices down nearly 1%.

  • ECB President Draghi has set the table for further euro weakness.  Not only did the ECB take technical measures by increasing the share limit to allow for an eventual expansion of QE, but it also lowered its growth and inflation forecasts and warned of downside risks to eurozone growth.  As we expected, the ECB’s dovishness has helped highlight the divergence theme in monetary policy on the eurozone side.  The US side is not so clear, but we hope it will become clearer after today.
  • US nonfarm payrolls report is the main event.  It is notoriously difficult to forecast given that there are few meaningful inputs.  The ADP report does a good job of catching the important trends, but on a month-to-month basis, it can be wide of the mark.  Still, it has stolen some of the thunder from the monthly BLS report.  ADP showed a 190k increase in private sector jobs in August, slightly below the 200k consensus.
  • The August number is particularly problematic, especially given that this is the last jobs report before the FOMC meeting.  The historical pattern is for August to disappoint on the initial release and subsequently be revised higher.  This is not a secret, and Fed officials likely are cognizant of it.  This suggests that some headline weakness may be tolerable, especially if some of the internals are robust.
  • Consensus sees the unemployment rate dipping to 5.2%, which is the upper end of the Fed’s estimate of full employment.  Economists did not expect hours worked to have increased in July and hence expect it to fall back to 34.5 in August.  There is potential for a surprise here.  It will be more difficult for hourly earnings to surprise.  Last August, hourly earnings rose 0.3%.  If it is not matched now (consensus 0.2%), there is a risk that the year-over-year rate slips back to 2.0%, where it was in June.
  • We suspect that the outcome of this month’s FOMC meeting does not rest on one high-frequency report.  The underlying trends in the US economy, however, have been persistent.  Growth on a year-over-year basis has been largely stable.  It may not be an impressive pace, but it has been sufficient to gradually close the output gap and absorb slack in the labor market.
  • While the nonfarm payroll change is difficult to forecast, it has been amazingly stable.  The 12-month average stands at 243k, the 24-month average at 236k, and the 36-month average at 222k.  That is nearly 8 mln net new jobs created over the past three years.
  • Canada will also report August jobs data today.  Consensus is for -5k jobs vs. +6.6k in July.  As always, the breakdown will be important.  In July, we saw -17.3k full-time jobs and +23.9k part-time jobs, so the details were worse than the headline number.  At 10 AM EST, Canada Ivey PMI will be reported.  Consensus is 53.3 vs. 52.9 in July, but this is a very volatile series.
  • Higher oil prices and a narrowing trade deficit have helped the Loonie.  After approaching CAD1.33 Thursday, the US dollar has been pushed below CAD1.3150, where the 20-day moving average is to be found.  A break of CAD1.3120 could spark another big figure decline toward CAD1.30.
  • Germany reported July factory orders earlier.  Orders came in at -1.4% m/m vs. -0.6% consensus and a revised 1.8% gain (was 2.0%) in June.    Weaker Eurozone data shouldn’t be unexpected, especially after the ECB downgraded its GDP growth forecasts for 2015-2017 at yesterday’s meeting.
  • Sweden reported July IP earlier.  It came in at -3.0% m/m vs. the +0.3% consensus and a revised -1.1% (was -1.0%) in June.  Industrial orders were flat m/m.  The Riksbank left policy steady yesterday, but continued weakness in the data will fan market expectations of a move at the next policy meeting in October.
  • Colombia central bank releases minutes.  We know that the decision to keep rates steady at 4.5% was not unanimous, with dissenters wanting to hike rates by 25 bp in order to help re-anchor inflation expectations.  However, officials are so far showing little concern about the weak peso.  The next policy meeting is September 25.  July exports will also be reported Friday, and another weak showing is expected due to low oil prices.  Colombia also reports July trade today.  It then reports August CPI on Saturday, and is expected to remain steady at 4.46% y/y.  This remains above the 2-4% target, and further acceleration could push more members of the central bank board into the hawkish camp.