Dollar Mixed Ahead of US Jobs Data

  • The highlight today will be US August jobs data; the pieces of the jobs puzzle have been mostly positive
  • Powell’s speech today is the last Fed speaking appearance before the media embargo kicks in
  • PBOC cut reserve ratios; Fitch cut Hong Kong’s sovereign rating a notch to AA with negative outlook. 
  • Germany reported weak July IP; yields on long-dated JGBs rose after BOJ Governor Kuroda’s comments
  • Canada reports August jobs data and Ivey PMI; Russia is expected to cut rates 25 bp to 7.0%

The dollar is mixed against the majors ahead of the US jobs data.  The Antipodeans are outperforming, while sterling and Swissie are underperforming.  EM currencies are also mixed.  ZAR and CNY are outperforming, while THB and TRY are underperforming.  MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.5%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.5%.  Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open.  10-year UST yields are up 2 bp at 1.58%, while the 3-month to 10-year spread has steepened 2 bp to stand at -37 bp.  Commodity prices are mostly lower, with Brent oil down 0.7%, copper down 0.4%, and gold down 0.7%.

Markets breathed a sigh of relief this week on perceived easing of tensions in the three key areas Brexit, Hong Kong, and US-China trade.  None of the underlying issues have been addressed.  Rather, all three have seen attempts at can-kicking.  We believe all three hot spots will come back to haunt the markets but this feel-good atmosphere may prevail for a little while.  How long is anyone’s guess but for now, risk is on and havens are down.

The dollar has had a rough week.  It is down against every major currency except the other havens yen and Swissie.  Virtually every EM is up on the week, the exceptions being the Thai baht and Indian rupee.  DXY is trying to get some traction today after two straight days of losses.  Whether it gets a toehold depends largely on the data today.

The highlight today will be US August jobs data.  Consensus sees 160k jobs added vs. 164k in July.  Average hourly earnings are seen falling to 3.0% y/y from 3.2% in July, due mostly to a high base effect.  Unemployment is seen steady at 3.7%.

The pieces of the jobs puzzle have been mostly positive.  Jobless claims for the survey week were low, while ADP reported 195k private sector jobs added.  On the other hand, the employment component for August ISM manufacturing PMI fell to 47.4 from 51.7 in July.  For ISM non-manufacturing, the employment component fell to 53.1 from 56.2 in July.

Powell’s speech today is the last Fed speaking appearance before the media embargo kicks in.   We do not expect him to tip his hand, but rather should follow the same balanced approach as the Beige Book did.  WIRP still suggests 100% odds of a cut September 18, with 11% odds of a 50 bp move.  While the market is so certain, we are not prepared to make a final call until after the major August US data have been reported.  The jobs data today is key, though we feel that retail sales data next Friday may be the most important of them all.

The NY Fed has a recession probability model that’s based on the shape of the US yield curve.  It’s updated monthly and the latest reading for August just spiked to 37.93% from 31.5% in July.  This is the highest since March 2008.  However, the yield curve inversion has been improving this month.  At -37 bp today, the 3-month to 10-year curve is the least inverted since August 22 and compares to peak inversion of -50 bp on August 28.  If this improvement continues, the recession odds should fall in September.

PBOC cut reserve ratios for all commercial banks by 0.5 percentage points.  The cut was widely expected after press reports and becomes effective September 16.  The ratio for some city commercial banks was cut by one percentage point that becomes effective in two steps on October 15 and November.  All told, the cuts will release CNY900 bln into the system.  For now, the PBOC is unlikely to cut policy rates outright.

Fitch cut Hong Kong’s sovereign rating a notch to AA with negative outlook.   The agency cited the current protests as testing the “one country two systems” framework.  While the agency said that framework should remain intact, it warned that recent events have inflicted long-lasting damage to investor perceptions of the quality of Hong Kong’s governance and the rule of law.  Lastly, Fitch said the negative outlook reflects the likelihood that the protests will persist.

Germany reported weak July IP.  Rather than rise the expected 0.4% m/m, IP fell -0.6%.  Yesterday, factory orders came in at -2.7% m/m and the weak orders data suggests little relief in sight for IP.  Weak data come even as some ECB officials are pushing back against more stimulus.  WIRP suggests 100% odds of a rate cut September 12, with 47% odds of a larger 20 bp move.  The euro remains heavy after making a new high for this move yesterday just below $1.11 and the close near the lows of the day.

Japan reported July household spending and cash earnings overnight.  Spending rose 0.8% y/y, as expected.  However, earnings were weaker than expected and may weigh on consumption going forward.  Earning fell -0.3% y/y vs. +0.1% expected, while real cash earnings contracted -0.9% y/y vs. -0.7% expected.  Real earnings have contracted y/y every month so far in 2019.

The yields on long-dated JGBs rose after BOJ Governor Kuroda’s comments.  He noted that yields on 20- and 30-year bonds had “fallen a bit too far,” adding that they negatively impact on life insurers and pension funds as well as consumer sentiment.  Kuroda added that pushing rates further into negative territory “is always an option.”

The jawboning and signs of further easing by the BOJ come after it tweaked its bond-buying program several times to encourage higher yields at the long end of the curve.  WIRP suggests no chance of a cut September 19 but nearly 80% odds of a cut October 31.  USD/JPY is little changed today after trading yesterday at the highest level since August 2.  Break of the 107.50 area is needed to set up a test of the August 1 high near 109.30.

Canada reports August jobs data and Ivey PMI today.  A 20k rise in jobs is expected vs. -24.2k in July.  Earlier this week, Bank of Canada delivered a less dovish than expected hold.  Data have been somewhat firm, leading market to push out BOC easing expectations.  WIRP suggests 46% odds of a cut October 30, rising to 56% December 4.

Russia central bank is expected to cut rates 25 bp to 7.0%.  If so, it would continue the ongoing global trend of monetary easing.  Yesterday, August CPI was reported at 4.3% y/y vs. 4.4% expected and 4.6% in July.  Inflation is the lowest since December and nearing the 4% target and if disinflation continues, Russia is likely to cut rates again at the next policy meeting October 25.