Dollar Mixed Ahead of US Jobs Report

  • Today’s jobs report takes on even more significance in the run-up to the September FOMC meeting
  • Implied rates is not pricing in a strong chance of a Fed hike next month
  • We note five other developments:  the RBA statement, the BOJ decision, Fonterra’s lower payout to New Zealand dairy farmers, Germany and France’s weak IP data, and UK trade numbers
  • Mexico and Brazil report their July inflation data today
  • The Brazilian central bank stepped up its FX intervention program

Price action:  The dollar is mixed against the majors in narrow ranges ahead of the US jobs report.  The antipodeans are outperforming, while the Scandies are underperforming.  The euro is trading around $1.0920.  Sterling is flat after yesterday’s losses on BOE disappointment, trading just above $1.55, while dollar/yen is trading just below 125.  EM currencies are mostly weaker, with RUB, TRY, and MYR underperforming.  The CEE currencies are outperforming.  MSCI Asia Pacific was flat, with the Nikkei up 0.3%.  The Shanghai Composite rose 2.3%, while the Shenzhen Composite rose 3.0%.  Euro Stoxx 600 is down 0.3% near midday, with Greek stocks rising for the second straight day, up 2.3%.  S&P futures are pointing to a lower open.  The US 10-year yield is up 1 bp at 2.23%, while European bond markets are narrowly mixed.  Commodity prices are mostly softer. 

  • While the US jobs report has been among the most important economic releases in the monthly cycle, it takes on even more significance in the run-up to the September FOMC meeting.  It is a particularly difficult number to forecast though some of the data contained in the employment report is used for input into other forecasts.  The ADP estimate was disappointing, and it cited layoffs in the energy sector and weaker job growth in manufacturing.  That said, its estimate had mostly been below the initial private sector nonfarm payroll report of the BLS.
  • Challenger showed a large spike in layoffs, 106k in July compared with a 44k average.  However, this appears to be mostly a function of a cut in the Army beginning in October, as part of a two-year plan it implemented.  Military personnel are not included in the nonfarm payroll figures, though they could impact the household survey.
  • There are three other factors that are more supportive.  The weekly initial jobless claims fell to new cyclical lows the same week that the BLS conducted its monthly nonfarm payroll survey.  The ISM non-manufacturing employment index saw a large jump to its strongest reading in a decade.  Strong auto sales (the July sales point to a healthy rise in retail sales to be released on August 13) prompted the producers to either reduce or cancel the typical summer shutdowns.
  • In addition to the nonfarm payroll number itself, average hourly earnings and the average weekly hours are often reviewed.  The Fed is looking at a broad range of labor market indicators to determine improvement.   Underemployment (U6) is at 10.5%, the lowest since 2008.  Involuntary part-time workers fell 147k in June to 6.505 mln.  Long-term unemployed (27+ weeks) fell 381k in June to 2.121 mln.
  • We note that the implied yield of the September Fed contract is 1.5 bp higher (at 19 bp) than where it finished the previous three weeks.  Over the past two weeks, the effective Fed funds rate has been averaging about 14 bp.  This suggests that even at this late date, the market is not pricing in a strong chance of a hike next month.
  • In addition to the US jobs data, Canada will also report its figures.  The market typically reacts more to the headline than the details.  In June, Canada reported a 6.4k jobs loss, but this masked a good report.  Canada grew 64.8k full-time jobs.  This would be as if the US posted a monthly gain of 650k.  The decline in overall jobs was a function of a loss of 71.2k part-time positions.  The US dollar was testing the CAD1.3200 area in the first half of the week, but now appears to be finding a base in the CAD1.3090-1.3100 area.
  • Earlier today were five macro-developments to note:
    1. The RBA’s monetary policy statement seemed to raise the bar for additional rate cuts.  It appears to have become more cautious as the Fed moves closer to lift-off.  It warned of further weakness in the Aussie on the divergence in policy.  The RBA estimates that another 10% decline could boost GDP by 0.5-1.0% over two-years.  It seems that the RBA is counting on currency weakness to do the heavy lifting instead of another rate cut.
    2. The BOJ left policy on hold and its economic assessment unchanged.  The recent subtle shift to a more determined effort by the BOJ to look through the impact of oil has dampened expectations for additional QE measures.  Sixteen economists in a Bloomberg survey of 37 do not expect additional stimulus.  Twelve expect QE to be expanded at the Oct 30 BOJ meeting (like last year).
    3. Fonterra lowered the payout to New Zealand dairy farmers by N$1.40, compared with expectations of a dollar decline.  This was partly mitigated by an extra subsidy payment.  The New Zealand dollar has steadied since putting in new multi-year lows on August 5 near $0.6490.  A move now above $0.6600 would lift the tone into next week.  It could start a correction that could carry it toward $0.6750.
    4. Germany and France reported disappointing June industrial production data.  Germany industrial output fell 1.4% in June.  The consensus called for a 0.3% gain.  The poor news was hardly offset by the small upward revision in May (to 0.2% from 0).  Manufacturing fell 1.3%, and construction fell 4.5%.  Energy output rose 2.3%.  French industrial output fell 0.1%.  The consensus was for a gain of 0.2%.  Ironically, both German and French industrial output is up 0.6% from a year ago.  French manufacturing fell 0.7% though the May series was revised to 0.7% from 0.6%.  Both countries report Q2 GDP next week.  The German economy is expected to have grown 0.5% (after 0.3% in Q1) though after today’s report there is a modest downside risk.  The French economy is expected to have grown by 0.2% after 0.6% expansion in Q1.
    5. The UK reported a somewhat smaller than expected June trade deficit of GBP1.6 bln.  However, this was largely negated by the revision to the May series to a GBP885 mln deficit from GBP393 mln initially reported.  That said, there was continued improvement (and more than expected) in the non-EU trade balance.  The key take-away from yesterday’s BOE’s Super Thursday is that while UK rates will likely rise, there is no strong sense of urgency.  A rate hike this year never seemed like a high probability scenario.  The debate now seems to be over whether the hike takes place in Q1 16 or Q2.
  • The Brazilian central bank increased the rollover rate of its FX swap program from 60% to 100%.  These swaps function as sales of dollars in the futures market and the adjustment of the rollover rate should be interpreted as a proxy of the BCB’s attitude towards FX moves. We believe that the trigger for the change was as much about levels as about pace.  USD/BRL reached an intra-session high of just under 3.57 yesterday.  In addition, the currency has been weakening much faster that its EM peers, falling 3.2% over the last 5 sessions, for example, only comparable with the RUB.  Over the same period, MXN was down only 1.3%, TRY was down 0.3%, and INR and KRW were both up around 0.5%.  The move by the BCB is unlikely to cause a sustained reversal of the trend, but it should help, especially after the more hawkish minutes earlier this week.
  • Mexico and Brazil report their July inflation data today. Brazil’s IPCA is seen rising 9.52% y/y vs. 8.89% in June.  Both IPCA and FIPE inflation are making new cycle highs, as are IGP-M and PPI wholesale inflation measures.  And with the currency making new cycle lows and fiscal story worsening, the risk is for the upside.  Mexico’s CPI is expected to rise 2.75% y/y vs. 2.87% in June.  Banco de Mexico kept rates steady last week and was dovish on the economy.  It noted continued cyclical weakness in the economy, particularly in non-auto manufacturing mining, and building.  Exports and investment have deteriorated compared to H2 2014, it added.  Yet Governor Carstens resumed talking about a rate hike.  We do not think he can follow through on this.