Nonfarm payrolls today likely to influence size of Fed rate cut

Good morning

We had some mixed data from the US yesterday.  Challenger job cuts was much worse than expected and ADP was also lower than expected, with a downward revision to the previous month as well, which sent USD lower to 1.3180, 1.1120 and 142.85 vs GBP, EUR and JPY respectively.  Jobless claims were pretty much in line, while the ISM PMI came in a touch better than expected which helped cap the USD selling for a while, but this morning we’re back up at 1.3190 and 1.1120.  USDJPY is down at 142.20, yen strength coming from talk that BoJ could raise rates faster than previously expected.

Eyes now fixed firmly on the nonfarms this afternoon.  Last month the headline was +114k, potentially weather affected, this time the consensus is for a pretty hefty +160k but after the employment numbers this week there does appear to be a risk that the headline could come in lower and/or we see a revision lower to the previous number.  I have to add though that historically none of the JOLTS, ADP or challenger have a great track record as a nonfarms indicator.   For the record, there is hope that the unemployment rate ticks lower to 4.2% and that average earnings rises to 3.7%.  So, the market is looking for a pretty strong set of numbers, which could make market reaction to a weaker surprise all the more exaggerated. 

Feds Goolsbee gave USD no support when he said inflation is coming down and unemployment is going up faster than Fed imagined back in June, and sees multiple rate cuts over the next twelve months.  This doesn’t really offer and clues for the short term decision of whether we see 25 or 50bps cut from the Fed in September but does highlight the move towards a more dovish Fed.  The weaker the number today, the more chance of a 50bps cut.   We have two Fed officials speaking today after the nonfarms, they are likely to be the last Fed officials we hear form before they enter the blackout period ahead of the Fed rate meeting on 18th Sept.

We do have CAD employment numbers as well this afternoon, regularly overshadowed by their North American neighbours but after the rather dovish BoC earlier in the week there is a chance this could come in worse than expected.  The unemployment rate is expected to come in at 6.5% form 6.4% last month but I have seen some suggestion this could come in as high as 6.7%.

So, plenty to keep us busy, which isn’t a bad thing.  I popped out yesterday afternoon just as the skies turned dark and I ended up getting drenched in a horrendous downpour.  We’ve got a load more rain forecast today and over the weekend.  All rather wintery, probably better if I just stay at my desk! 

Some news from the nations league last night.  Ronaldo, at the age of 39, scored for Portugal in their win over Croatia to put him on an incredible 900 career goals.  Still performing at the top level.  Not quite at the same level, but still impressive, was San Marino ending their twenty year, 140 match winless run with a win over Liechtenstein.  The lad that scored hadn’t been born when San Marino last won. 

Looking to the weekend, England play tomorrow evening, their first match under Lee Carsley, the interim manager after Southgate’s departure.  It will be interesting to see what team he selects and how he wants the team to play.  He was manager of England U21’s and by all accounts had them playing some exciting stuff. 

Have a great day and a great weekend.  Stay dry!

-  08.00 ECBs Elderson speaks

-  10.00 EU employment

-  13.30 US nonfarm payrolls

-  13.30 CAD unemployment

-  13.45 Feds Waller speaks

-  15.00 CAD Icey PMI

-  16.00 Feds Waller speaks

Market looking for signs of weakness in US labour market

Good morning

After a morning of relative calm, a softer JOLTS release sent USD lower yesterday afternoon, with GBPUSD trading as high as 1.3175 and EURUSD to 1.1095, while USDJPY slumped to 144.00.  We saw something of a reversal of these moves before the London close but the important thing for me is how the US dollar quickly reacted to weaker data, which puts us on higher alert should Fridays nonfarms disappoint.  GBPUSD and EURUSD currently 1.3140 and 1.1080 respectively.

Feds Daly said yesterday that rate cuts will be needed to protect the labour market, no clues as to the size of cuts at the next meeting but she did say that although the Fed can be aggressive when the outlook is clear, there are currently uncertainties and inflation is not fully under control.  Leads me to think again that 25bps seems reasonable this time around.  However, Fed beige book did show nine districts reporting flat or declining activity, up from five last time

BoC did indeed cut rates by 25bps yesterday, the third such cut in successive meetings, which took rates to 4.25% and initially sent CAD a touch lower before the US jobs number took the limelight and sent USDCAD lower, capping the CAD weakness.  BoC’s statement explained that they are getting more worried about the economy and there is potential for weakness in the coming months.  Tomorrows Canadian employment numbers will be interesting, a weak set of numbers would well open up talk of a possible 50bps cut by BoC next month

At the other end of the spectrum, we have seen talk from BoJs Takata of possible rate rises from BoJ which pushed yen higher, USDJPY touching 143.05 this morning.  We’ve also had hawkish comments from RBAs Bullock, suggesting it is too early to think of rate cuts and the priority remains to bring inflation lower.  With the inflation outlook still unclear, she suggests RBA will want to see Q3 CPI before making any decisions.  Her comments come after a larger than expected Aussie trade surplus was reported.  She speaks again this morning.

More US employment numbers today in the form of ADP, challenger and initial jobless claims, while we also have the ISM PMIs later.  The main event comes tomorrow afternoon with the nonfarm payrolls but the market will be watching the releases today for any further clues as to whether the US labour market is in trouble.

Football action this evening comes in the form of the Nations League, with Scotland taking on Poland.  England play on Saturday against Republic of Ireland.  Seems strange that there should be an international break so soon after the start of the season.  I’m sure there is a sensible reason for it.

-  10.00 EU retail sales

-  10.00 RBA Bullock speaks

-  12.30 US challenger job cuts

-  13.15 US ADP employment

-  13.30 US initial jobless claims

-  14.45 US S&P composite PMI

-  15.00 US services ISM

Holidays are over...

Good morning

Today marks the rather concerning 35th anniversary of me starting working in the city.  You’d think by now I’d know it all but as I have discovered over the years, there is always a surprise or something new to learn lurking just around the corner.   I guess the same is true for all industries, but ours just seems to have more than its fair share of 19 year old ‘experts’ who claim to know everything and have, in reality, seen very little.  Regardless, after all these years I’m still enjoying ensuring clients minimise their risks and maximise their profits.  What is there to not enjoy about that!

Well, having said that all that, I’m still struggling to come to terms with being back from a two week jaunt around Europe.  It was hard work, a lot of walking in high temperatures, a lot of food and a very decent amount to drink.   I think I was running on empty by the end of it and am paying the price now. 

But enough about me.  Over to the markets.  The first trading day for US equities in September didn’t go well, with Nasdaq falling over 3%, S&P over 2% and Dow Jones down 1.5%.  Nvidia’s near 10% decline after it got a BoJ subpoena didn’t help matters.  It was a bad day for equities elsewhere as well, UK and EU dropped but we’re likely to see further declines this morning after Asian markets also suffered, with Nikkei down over 4%.  In currencies, we had a very slightly stronger USD again yesterday despite a mixed ISM release, I think the higher than expected employment index element helped support the US dollar.  Nothing too spectacular, GBPUSD traded down to 1.3090 from 1.3145 and EURUSD slipped from 1.1070 to 1.1035, both pairs are off the lows as I type at 1.3115 and 1.1060 as I type.  Meanwhile GBP had gained against EUR through the day to reach almost 1.1900 but was unable to hold those gains, falling back to 1.1860.

Aussie GDP overnight came in as expected, many are highlighting this morning that these are the weakest set of growth data since 1991 if we exclude the Covid years.  AUD traded lower, GBPAUD pushed up to 1.9600 on the release but is back at 1.9540 as I type, GBPNZD is 2.1200.  Aussie trade balance due out tonight, expected to show another surplus. 

BoC meet today and it is widely expected that they will cut rates by 25bps for the third meeting in a row, which would take rates to 4.25%.  While there are still some who look for no change, recent Canadian data has not been great recently and does seem to support a rate cut.  This Friday we’ll get the latest employment data from Canada which is expected to show unemployment rate at 6.5%, the highest level for seven years, discounting the Covid years.  That’s the second time this morning that I’ve mentioned historical data excluding Covid, I imagine we’ll see a lot more of this in the coming weeks, months and years. 

US employment numbers this afternoon in the form of JOLTS, one of the Fed’s favourite measures, although as we know the main event will be nonfarms on Friday.  Plenty of scope for a bit of market movement while the markets continues to debate a 25 or 50bps cut from the Fed this month.  I’m erring on 25bps, anything larger could well give the markets some reason to panic that a recession is looming.  Fed were slow to raise rates and I think they have time to slowly cut, barring a shock to the downside for employment.

Right, most kids are back to school this week which puts the summer holidays firmly behind us.  Some heavy rain looks forecast and temperatures will be just below the 20°c area.  All back to normal then!

Have a great day

-  08.00 ECBs Elderson speaks

-  09.00 EU composite PMI

-  10.00 EU PPI

-  14.45 BoC rate announcement

-  15.00 US JOLTS job openings

-  19.00 Fed Beige book

-  02.30 AUS trade balance

-  03.00 RBAs Bullock speaks