payrolls

FX Daily: Trading the 50-50 risk Despite the very strong headline US May payroll figure, rising unemployment and declining wage inflation are keeping markets from fully pricing in a June Fed hike (we expect a hold). Barring a big ISM services surprise today, the lack of other key inputs before next week’s CPI could keep the dollar capped. The RBA decision tomorrow is also a 50-50 decision     USD: Not enough to price in a June hike The blowout May headline payroll number added fuel to the narrative of an extra tight US labour market, but the coincidental rebound in unemployment to 3.7% and slowdown in wage growth kept markets from going all-in on a June rate hike by the Federal Reserve. As discussed in this note by our US economist, payrolls and the unemployment rate are calculated through different surveys: the former by employers, and the latter by households. In practice, firms and households conveyed very different messages about the direction of the US labour market in May.   We think that, when adding the cooling off in wage inflation, and considering the diverging views within the FOMC, the case for a pause at the 14 June meeting should prevail. The last big risk event before the rate announcement is the 13 June CPI reading, while today’s ISM services figures (the consensus expects a mild improvement) might have a somewhat contained impact on rate expectations, barring major diversions from expectations. The FOMC has already entered the black-out period.   Markets are currently pricing in a 25-30% implied probability of a hike in June, while 21bp are factored in by the end-July meeting. We suspect that the pricing may not vary considerably, or that the narrative of a “50-50” chance of a hike in June may prevail until the CPI numbers next Tuesday – and barring a surprise there – into the FOMC announcement itself.   With markets not having received enough compelling evidence from the May jobs report to price in more than a 50% probability of a June hike, we feel that two-year USD swap rates, which rebounded to 4.73% after having declined to 4.51% on Friday, may struggle to find much more support this week.   Add in a period of potential market sentiment stabilisation now that the debt-ceiling saga has ended and we think the dollar's bullish momentum may dwindle into the FOMC meeting.   We see a higher chance of DXY stabilising around 104.00 or pulling back to 103.00. Some pro-cyclical currencies could emerge as outperformers in this period: the Canadian dollar, for example, may stay supported now that Saudi Arabia announced another one million barrels a day of oil production cuts and even if the Bank of Canada stays on hold on Wednesday, as long as it keeps the door open for a potential hike down the road.    

FX Daily: Hawkish Fed minutes raise the bar for data disappointment Yesterday’s release of the June FOMC minutes gave very few reasons to doubt the Fed’s determination to keep raising rates. In a way, the bar for data disappointment and consequent dovish repricing may now be higher. Still, expect a hit to the dollar if the ISM services fall into contractionary territory. Job openings and ADP payrolls will also be watched.   USD: Growth and jobs under the microscope The narrative that emerged from the minutes of the June FOMC meeting fell unequivocally on the hawkish side of the spectrum. The summary of opinions confirmed some divergence within the committee, as some members would have favoured a hike already in June, but accepted a pause and signalled instead more tightening via the new dot plot projections. “Almost all” participants thought more tightening was likely this year. There was also an acknowledgement of ongoing firm GDP growth and high inflation, with core inflation, in particular, showing no tendency to ease as of yet this year. The Fed also noted that credit remains available to high-rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Still, the risk of a credit crunch was deemed modest. All in all, the minutes offered no reason to doubt the Fed will go ahead with a July hike (85% priced in) unless data points firmly in the opposite direction on the economic and inflation side. The hawkish minutes, however, may have further raised the bar for disappointing data to cast doubt on further tightening. Today, the ISM services figures for June will be closely watched, as last month’s print (50.3) surprised sharply on the downside. Consensus is expecting a rebound to 51.2, while another surprise drop could take the index into contractionary territory – where the ISM manufacturing has been for the past eight months. Expect any surprises on the ISM release to drive most of the dollar reaction today, but markets will also look at some labour data, in particular, the JOLTS job opening figures for May and the ADP payrolls for June. The dollar has drawn some strength from the hawkish FOMC minutes, which have so clearly pointed to more tightening, that it will probably take some substantial downside surprise for markets re-consider their expectations. With this in mind, the dollar's reaction to today’s data may not prove particularly long-lived, especially if tomorrow’s payrolls continue to point to a tight jobs market and keep a post-July hike on the table.    

Rates Spark: The burning question is whether payrolls agrees with the ADP Moves yesterday took us to break-out levels for market rates. It does not feel like the move is over yet, and today's payroll report will have its say first. A weak report would look like a contradiction given the ADP, but payrolls are still the dominant driver. The market will also have an eye on US CPI next week.   A consensus-type outcome for payrolls will take market rates off their highs The latest report from ADP National Employment for June reported a 497k increase in US jobs. That is undoubtedly strong, and double the 250k average seen in recent months. Challenger job cuts also showed a slowdown in cuts, also pointing to resilience in the labour market. The American economy is fighting back, despite what the Fed has been up to. The 10yr is now at over 4%. We think it will stay above 4% over the coming weeks and potentially months. And the 2yr will hold on to a 5% handle, with a 100bp curve inversion being sustained. The inversion points to a reversal lower in market rates ahead, and a recessionary tendency. While that sounds unseemly given what we see in front of us, the rise in market rates will ultimately have its effect. But that’s not the focus for now – the focus is on taking out prior highs hit in this cycle for market rates. The Services ISM report confirmed that the situation popped higher in June. The employment component, which had dipped below 50 in the previous month, is now at 53.1. New orders rose to 55.5, and the overall index to 53.9. These are not particularly high readings, but importantly they are reversing some of the declines seen in previous months. Prices paid also eased lower, to 54.1. That in fact is a very tolerable outcome, as the long-run average for prices paid is 60. Market yields can be comforted by the calming in implied inflation expectations. But it can, at the same time, be a tad concerned that macro strength in the services sector could frustrate ambitions to get inflation materially lower in the coming months. So nothing here to reverse the tendency for yields to test higher. Get used to a 4% handle on the 10yr – it’s here to stay for a while. That said, we will need to see the payrolls report first. It's a June report, the same as the ADP. The question is whether it shows the same spurt that the ADP did. Often the correlation between the two is remarkably weak. But even if we get a consensus outcome in 200k plus territory that would not take market rates materially off their highs. For that, we'd need to see a material rise in the unemployment rate and a notable fall in wages inflation. Neither of these are expected. If we get a consensus-type report, it is possible that the market takes yields off their extremes into the weekend, but we'd still maintain that there has been enough in the past few days of data for any pullback to be reversed next week, and for the push higher in yields to continue.   2Y UST at 5%, 10Y at 4% and now eying cycle peaks   The week ahead will shine a light on the inflation side Data in the week ahead will shine a light on the inflation development in the US with CPI taking centre stage on Wednesday. The consensus is looking for the headline rate to drop to 3%, but given that this is mainly down to known base effects, it will likely be outweighed by core inflation remaining uncomfortably high at 5%. Persistent core inflation also means no let-up in Fed hawkishness. Nonetheless, there are also other indicators to watch which should point to declining pipeline pressures like the producer prices. Also, keep an eye out for the University of Michigan consumer sentiment survey and its inflation expectations measure.   In the eurozone, the main releases are the final CPIs as well as the European Central Bank accounts of the June meeting. Remember that the ECB all but preannounced another hike for this month. Given the disappointing macro backdrop and question marks surrounding the tenability of the ECB’s hawkish stance, markets will most likely scrutinise the accounts for any growing concerns about the underlying economy which could pave the way for a more heated debate between the hawkish and dovish camps. The balance sheet may feature given the targeted longer-term refinancing operations repayment, but we don’t suspect any discussion around extending quantitative tightening with asset purchase programme reinvestments having stopped just this month. UK jobs data, and in particular wages, will be a focus for sterling markets where the 6.50% terminal rate is now almost fully priced for the first half of 2024.   Today's events and market views All eyes are on US non-farm payrolls number today after the huge surprise in the ADP estimate. The consensus still stands at 230k, but Bloomberg’s whisper number, which compiles individual user estimates, has jumped to 270k. The unemployment rate is expected to ease back to 3.6% while average hourly earnings are seen to have risen by 0.3% month on month again. Unless there is a huge downside surprise, that would put the job market’s resilience into question. We think the 4% handle for the 10Y UST could accompany us for a while. The counter notion is that the sheer size of the move should call for at least some reversal, but if anywhere we would make that case for Bunds that got dragged higher alongside Treasuries. It also appears that fall-out for risk sentiment was more noticeable in EUR space, in sovereigns certainly with spread widening, which could add to the resistance against a further move higher.    

FX Daily: Dollar late to the party Treasuries are hitting key levels on big US data surprises, but the dollar is not finding real support. The dollar may be mirroring some lingering reluctance to align with the dot plot’s two hikes, but market conditions point to a stronger greenback in the near term, barring a substantial downside surprise in payrolls today. Watch jobs numbers in Canada too.   USD: Surprisingly soft The large and unexpected jump to almost 500k in ADP private payroll numbers yesterday left clear marks across asset classes. Despite some recovery later in the session, US equities took a hit, and European ones closed with a nearly 3.0% loss. Treasuries are now trading around the two key benchmarks: 5.0% for the 2Y and 4.0% for the 10Y after a disastrous session for bonds. This would appear to be the perfect recipe for a substantial dollar rally, which hasn’t materialised however, and we are observing instead some dollar selling this morning. Indeed, the dollar had already moved in advance of yesterday’s release as the minutes had offered clear hawkish hints on Wednesday. Incidentally, markets still appear unconvinced to fully price in two rate hikes by the Fed despite the strong ADP (which arguably aren’t hard data, and have been misleading at times) and ISM services figures. The Fed funds curve has not shifted particularly higher, with the peak rate still seen at 36bp from here, so 14bp short of dot plot projections. In a way, the dollar might still be mirroring that lingering market pricing-dot plot gap. At the same time, the market backdrop does seem to point at dollar strength at this juncture, as we doubt this morning’s mild USD correction will have legs unless US payrolls released later today move in the direction of ADP figures and surprise on the downside. The consensus for the headline jobs number is 230k, but may be higher after the strong ADP read. Unemployment is also expected to tick lower to 3.6% and some focus will, as usual, fall on wage growth. Barring major disappointments, it should not take much to keep the Fed’s hawkish narrative going, and markets should have room to keep inching closer to the pricing in two rate hikes. The path for a more supported dollar in the near term appears to be the most obvious one, in our view, and a return above 104.00 in DXY in the coming days looks likely.

FX Daily: Dollar late to the party Treasuries are hitting key levels on big US data surprises, but the dollar is not finding real support. The dollar may be mirroring some lingering reluctance to align with the dot plot’s two hikes, but market conditions point to a stronger greenback in the near term, barring a substantial downside surprise in payrolls today. Watch jobs numbers in Canada too.   USD: Surprisingly soft The large and unexpected jump to almost 500k in ADP private payroll numbers yesterday left clear marks across asset classes. Despite some recovery later in the session, US equities took a hit, and European ones closed with a nearly 3.0% loss. Treasuries are now trading around the two key benchmarks: 5.0% for the 2Y and 4.0% for the 10Y after a disastrous session for bonds. This would appear to be the perfect recipe for a substantial dollar rally, which hasn’t materialised however, and we are observing instead some dollar selling this morning. Indeed, the dollar had already moved in advance of yesterday’s release as the minutes had offered clear hawkish hints on Wednesday. Incidentally, markets still appear unconvinced to fully price in two rate hikes by the Fed despite the strong ADP (which arguably aren’t hard data, and have been misleading at times) and ISM services figures. The Fed funds curve has not shifted particularly higher, with the peak rate still seen at 36bp from here, so 14bp short of dot plot projections. In a way, the dollar might still be mirroring that lingering market pricing-dot plot gap. At the same time, the market backdrop does seem to point at dollar strength at this juncture, as we doubt this morning’s mild USD correction will have legs unless US payrolls released later today move in the direction of ADP figures and surprise on the downside. The consensus for the headline jobs number is 230k, but may be higher after the strong ADP read. Unemployment is also expected to tick lower to 3.6% and some focus will, as usual, fall on wage growth. Barring major disappointments, it should not take much to keep the Fed’s hawkish narrative going, and markets should have room to keep inching closer to the pricing in two rate hikes. The path for a more supported dollar in the near term appears to be the most obvious one, in our view, and a return above 104.00 in DXY in the coming days looks likely.

5M chart of GBP/USD   The GBP/USD jumped solidly upwards on Monday, with volatility exceeding the 100-point mark. A speech by Bank of England governor Andrew Bailey was scheduled in the UK yesterday, but it was planned for the evening, so it couldn't have any influence on the pair's movement during the day. Nevertheless, in the second half of the day, the dollar slumped, which we can associate with the upcoming US inflation report, which already suggests a sharp slowdown to 3.1%. If the forecasts come true, then this report is already accounted for, and the likelihood of two more rate hikes in 2023 will drastically decrease. Theoretically, the broad US dollar weakness is logical, but let's also remember that this pattern is not always observed.   The market still uses any excuse to buy the pair. The momentum persists. There was only one entry point yesterday. At the beginning of the US session, the pair bounced off the 1.2762 level and the Kijun-sen line of the Ichimoku indicator, afterwards it rose to the 1.2863 level. The long position should have been closed manually closer to the evening, so the profit on it was about 70 points. An excellent trading day!   COT report:     The GBP/USD jumped solidly upwards on Monday, with volatility exceeding the 100-point mark. A speech by Bank of England governor Andrew Bailey was scheduled in the UK yesterday, but it was planned for the evening, so it couldn't have any influence on the pair's movement during the day. Nevertheless, in the second half of the day, the dollar slumped, which we can associate with the upcoming US inflation report, which already suggests a sharp slowdown to 3.1%.   If the forecasts come true, then this report is already accounted for, and the likelihood of two more rate hikes in 2023 will drastically decrease. Theoretically, the broad US dollar weakness is logical, but let's also remember that this pattern is not always observed. The market still uses any excuse to buy the pair. The momentum persists.   There was only one entry point yesterday. At the beginning of the US session, the pair bounced off the 1.2762 level and the Kijun-sen line of the Ichimoku indicator, afterwards it rose to the 1.2863 level. The long position should have been closed manually closer to the evening, so the profit on it was about 70 points. An excellent trading day!       In the 1-hour chart, GBP/USD maintains a bullish bias. The ascending trend line serves as a buy signal. So, traders are opening new long positions. However, the pound sterling is overbought. It is likely to decline in the medium term. Yet, it surpassed the descending trend line. Hence, it could move to new highs.   Yet, it surpassed the descending trend line. Hence, it could move to new highs. According to the technical analysis, the pound sterling has drivers for a further increase. And the market is happy to take any opportunity to sell the dollar. On July 11, trading levels are seen at 1.2349, 1.2429-1.2445, 1.2520, 1.2598-1.2605, 1.2693, 1.2762, 1.2863, 1.2981-1.2987. Senkou Span B (1.2714) and Kijun-sen (1.2719) lines can also provide signals, e.g. rebounds and breakout of these levels and lines. It is recommended to set the Stop Loss orders at the breakeven level when the price moves in the right direction by 20 pips.   The lines of the Ichimoku indicator can move during the day, which should be taken into account when determining trading signals. There are support and resistance levels that can be used to lock in profits. On Tuesday, the UK will publish at least three reports that could stir some market reaction. Jobless claims, unemployment and payrolls. We believe that the unemployment data may have an impact on the traders' mood. If they turn out to be optimistic, the pound will receive a new opportunity to extend its upward movement. Indicators on charts: Resistance/support - thick red lines, near which the trend may stop. They do not make trading signals. The Kijun-sen and Senkou Span B lines are the Ichimoku indicator lines moved to the hourly timeframe from the 4-hour timeframe.   They are also strong lines. Extreme levels are thin red lines, from which the price used to bounce earlier. They can produce trading signals. Yellow lines are trend lines, trend channels, and other technical patterns. Indicator 1 on the COT chart is the size of the net position of each trader category. Indicator 2 on the COT chart is the size of the net position for the Non-commercial group of traders.    

EUR: ECB radio silence not helping the euro EUR/USD remains a dollar story and with the US data calendar about to pick up (ADP, ISM services, payrolls), the dollar leg should remain dominant given that most key eurozone data was already published earlier this week. We discussed yesterday the market’s reluctance to price in more than a 50% chance of another hike by the ECB, despite sticky core inflation. One thing missing may be the lack of the usual post-ECB communication re-tuning by governing council members (due to the summer season, more than anything else). The calendar of ECB speakers continues to show only Fabio Panetta tomorrow, and he is the most dovish voice, so unlikely to lift rate expectations. The US credit downgrade helped EUR/USD avert a move below 1.0950, but more pressure on the pair is definitely on the cards should US data prove robust. A test of 1.0900 by the end of the week seems feasible.

ADP posts 177,000 new jobs but traders not convinced US Q2 GDP revised lower to 2.1% (2.4% previously) USD pares six week gains after weaker figures this week   The recovery in equity markets appears to have stalled on Wednesday as traders likely eye the big economic releases later in the week. The ADP and revised GDP numbers may attract some attention but they were never likely to have too great an impact. The ADP report has long been ignored as a reliable precursor to the NFP report on Friday and at times it’s frankly been wildly off. That it’s come in at a reasonable 177,000 doesn’t offer any real insight in terms of Friday’s payrolls, with the focus instead remaining on them in relation to yesterday’s JOLTS data which saw a marked decline. If we see a trend of weaker hiring and fewer job openings then the Fed will be more at ease ending the tightening cycle. Today’s data was never likely to be overly impactful with tomorrow’s inflation, income, and spending figures, prior to Friday’s payrolls, always the primary focus. That could well set the tone for September ahead of some major central bank meetings.   EURUSD has been buoyed by the recent economic data, with the figures indicating that the higher for longer narrative may be less intense than feared.   EURUSD Daily       The pair has now rallied for three days and is closing on an interesting level around 1.10 where it may run into some resistance from the 55/89-day simple moving average band. It’s also a notable psychological level. There are also some interesting Fib levels around here if this is merely a corrective move following the sell-off of the last six weeks.

Metals – Fresh stimulus from China for the property sector Base metals prices extended this week’s gains this morning as healthy economic data and fresh stimulus measures in China buoyed sentiment. Caixin manufacturing PMI in China increased to 51 in August compared to 49.2 in July; the market was expecting the PMI to remain around 49. This is the strongest manufacturing PMI number since February. Meanwhile, Beijing has announced fresh stimulus measures aimed at supporting the property sector. The People’s Bank of China has lowered the minimum downpayment for mortgages for both first-time buyers (from 30% to 20%) and second-time buyers (from 40% to 30%) while the minimum interest premium charged over the Loan Prime Rate has also been reduced. China is also allowing customers and banks to renegotiate interest rates on existing housing loans which could reduce interest expenses for borrowers. LME continues to witness an inflow of copper into exchange warehouses. LME copper stocks increased by another 3,675 tonnes yesterday, taking the total inventory to a year-to-date high of 102.9kt. Meanwhile, cancelled warrants for copper remain near zero levels, hinting that there may not be any inventory withdrawals from LME in the short term and total stocks could continue to climb over the coming weeks. Europe witnessed an inflow of 2,700 tonnes yesterday whilst 950 tonnes were added in the Americas and 25 tonnes in Asia. Gold prices have held steady at around US$1,940/oz as the latest economic data from the US eased some pressure on the Federal Reserve to continue with rate hikes. The core PCE (Personal Consumption Expenditure) deflator in the US increased at a flat 0.2% month-on-month in July, the second consecutive month at 0.2% which should help the Fed in getting inflation back on track to around 2%. On the other hand, data from Europe was not that supportive with core CPI falling gradually from 5.5% to 5.3% and CPI estimates remaining flat at 5.3%. The focus is now turning to today’s US non-farm jobs report which is expected to show a smaller rise in payrolls in August.

GBP: Wage data not as hawkish as it looks The UK has just released wage and employment data. On the face of it, an as-expected 7.8% three-month/year-on-year rise in ex-bonus weekly earnings in July makes the case for the Bank of England to remain hawkish. But here is what our UK economist, James Smith, thinks of the data.    The UK wage numbers are actually more dovish than they look at first glance. At the headline level, regular pay growth stayed at 7.8% on a 3M/YoY basis- - no surprises there. But drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July. And if we look at the altnerative wage measure based on payrolls, that actually fell in level terms for the second consecutive month. It is only one data point, admittedly, and several upside surprises preceded it. But with unemployment notching higher, the labour market data doesn't scream a need to keep hiking rates much further. We think it right not to chase EUR/GBP too much lower on this data (it is currently reversing from a brief dip to 0.8570) and what could prove a mildly hawkish ECB on Thursday warns of EUR/GBP breaking above 0.8600 later this week.

The UK jobs report is more dovish than it looks Private-sector wage growth in the UK barely increased in level terms between June and July, and alternative data from payrolls showed a second consecutive fall in median pay. We still expect a rate hike next week but with unemployment rising too, this latest data doesn't scream a need to lift rates much further.   The UK wage numbers are more dovish than they look at first glance. At headline level, regular pay growth stayed at 7.8% on a 3M/YoY basis - no surprises there. But drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July. And if we look at the alternative wage data which is based on payroll figures (or PAYE), that actually fell in level terms for the second consecutive month. Admittedly we do need to treat all of this with some caution. One month doesn’t make a trend and the latest private-sector regular pay figure, which is the bit the Bank of England is focused on, was preceded by several upside surprises over recent months. But it comes alongside various signals that the labour market is cooling more noticeably.   Private sector pay barely increased in level terms  

Asia Morning Bites 2 November 2023 Asian markets digest US Treasury yield swing ahead of payrolls release tomorrow.   Global macro and markets Global markets: If last night’s FOMC meeting was supposed to be a “hawkish pause”, then markets weren’t listening. Yields on the 2Y US Treasury note dropped 14.4bp, taking them below 5% (4.944%), and there was an even bigger drop at the longer end. 10Y yields fell 19.7bp to 4.734%, and implied rates now show a 25bp cut priced in at the June meeting in 2024. FX markets are still a bit mixed and may spend today catching up with the implications of the drop in yields. EURUSD is fractionally higher at 1.0582, having drifted lower for most of yesterday. The AUD is looking stronger, probably as markets (and ourselves) are firmly of the view that the RBA actually hikes rates again next week, closing the policy rate gap with the US a bit. AUDUSD is now up to 0.6418. Cable is also a little higher after a choppy session, and is currently trading at 1.2177, while the JPY has edged slightly down from yesterday’s highs to 150.65. Losses from the THB, KRW and IDR yesterday will likely reverse today and follow the AUD and JPY. US stock markets were lifted by the drop in bond yields. The S&P 500 rose 1.05%, while the NASDAQ was up 1.64%. Chinese stocks were broadly flat yesterday. G-7 macro: Here is a link to our US economist, and FX and rates strategists’ note on the FOMC meeting. The twin features of the Fed suggesting that higher yields are doing some of their work for them, plus lower supply issuance pressures at the longer end are probably the main causes of the big drop in yields overnight. Nevertheless, the Fed is still leaning towards higher, not lower rates, so last night’s bond swing may not be the end of the story just yet. Ahead of the non-farm payrolls release tomorrow, yesterday’s ADP print was 113K. That is close to its 89K reading last month, which was hopelessly inaccurate, so it is anyone’s guess if this is a useful, or contrarian steer ahead of payrolls. Perhaps more ominously, the manufacturing ISM slowed sharply. The headline ISM index was already in negative territory in September (49.0), but dropped to a much weaker 46.7 reading in October, with a sub-50 employment index too (46.8). New orders also dropped sharply to 45.5. Today’s US macro data is the final durable goods/factory orders data for September, which won’t have much additional bearing on the market in all likelihood. The Eurozone releases its own manufacturing PMI data today. Korea: Consumer price inflation unexpectedly rose to 3.8% YoY in October (vs 3.7% in September, 3.6% market consensus, 3.9% INGf). Korea’s inflation has been reheating for three months in a row after the recent low of 2.3% in July.  Food and energy was the main reason for the rise; fresh food (12.1%), gasoline (6.9%), public transportation fees (11.3%), taxi (20%), and dairy products (milk 14.3%). Core inflation excluding food and energy edged down to 3.2% YoY, but has stubbornly stayed around that level for four months. Looking ahead, we expect headline inflation to climb even more to touch the 4% level in November but we look for core inflation to ease down into the 2% range, mostly due to base effects. This will make it more likely that the BoK will hold its hawkish stance longer than expected, but another rate hike possibility is still low. Japan: Prime Minister Fumio Kishida is planning to announce an economic stimulus package. The planned size, JPY21.8 trillion, is smaller than in the pandemic era, but still higher than the market expected. But markets seem a little sceptical of the positive impact this stimulus package will have on the economy. A highlight of the stimulus is income and residential tax rebates to aid households (especially low-income households), hit by higher inflation. But the impact of tax rebates is usually smaller than cash transfers or shopping vouchers. Also, the rebates will only be temporary, thus the impact could be limited. Australia: Australia's trade surplus narrowed sharply in September. Exports fell 1.4% MoM, (partly reversing last month's 4.5% gain). But the main damage was done by a solid 7.5% MoM increase in imports, with imports of capital goods rising especially strongly, taking the surplus down from AUD10.2bn to AUD6.8bn.  Malaysia: Bank Negara Malaysia will meet today to discuss policy rates, and is unanimously expected to leave rates unchanged at 3.0%. inflation is currently only 1.9%YoY, so there is no need for them to tighten at this stage. 

Soft US jobs report reinforces the message that the Fed's work is done Labour market numbers are always the last thing to turn in an economic cycle so the softening in employment and wage growth and the rise in the unemployment rate makes it all the more likely that the Federal Reserve won’t hike interest rates again.   Payrolls momentum continues to soften Today’s US jobs report is softer than predicted everywhere you look. Payrolls rose 150k in October versus the 180k consensus while there were 101k of downward revisions to the past two months. The unemployment rate ticked up to 3.9% from 3.8% (consensus 3.8%) while wages came in at 0.2% month-on-month/4.1% year-on-year, whereas the consensus was 0.3%/4.0% with revisions impacting the flow a little there. It is down from 0.3%/4.3% last month and when you strip out the pandemic distortions it is the weakest annual pace of wage gains since before the pandemic struck. Below is a chart of the monthly change and the 3M average, showing the decelerating trend in employment growth.    Monthly change in non-farm payrolls & 3M moving average (000s)   Jobs growth concentrated in just three areas The details show manufacturing employment fell 35k, which was impacted by the auto strike action and associated knock-on effects with suppliers. All the strength was again concentrated in government (+51k) and education and health (+89k). Year-to-date employment in education/health is up 3.5%, leisure and hospitality is up 2.5% and government is up 2.5%. The rest of the economy has seen employment rise just 0.6%.   Where the jobs have come from in 2023 (Cumulative increase in employment in 2023 000s)   The rise in the unemployment rate and underemployment rate (to 7.2% from 7%) despite the participation rate dropping back to 62.7% from 62.8% points to a loosening labour market, a message reinforced by the weaker wage growth. This should give the Fed a bit more confidence that inflation can continue its softening trend, especially in the wake of the big falls seen in gasoline prices.   The Fed just needs to sit and wait Low response rates from businesses and households to create this data have reduced the credibility of the report and are intensifying inconsistencies (household employment fell 348k, for example, despite payrolls rising 150k). But the US is not alone. This is something that is being experienced across developed markets and means we are seeing (and will continue to see) significant revisions. Nonetheless, payrolls is the number that markets focus on and with unemployment rates and wages softening it all reinforces the view that the Fed is finished hiking interest rates.

Rates Spark: Pressure at the extremities The fair value number for the US 10yr yield is 4%, but we really need to see Friday's payrolls number first. The bond market is screaming at us that it'll be weak. But unless validated, the rally seen of late is vulnerable. Also be aware of front end pressure, although this was calmer yesterday.   Resumed inversion points to overshoot risk in the 10yr yield An interesting aspect of the price action in the past couple of days has been the resumed inversion of the US curve. The front end is participating in the falling yields trend, but the 10yr benchmark is leading it. That can reflect an overshoot tendency in the 10yr. It is true that the JOLTS data showed a surprise drop in job openings, but that should have been just as capable of sparking a larger front end move, helping to dis-invert the curve. At the same time, such price action is consistent with a 2yr yield that does not yet see a rate cut as a front and centre event. Typically, the 2yr really gaps lower about three months before an actual cut. But in the meantime, it should be capable of keeping better pace with the falls in yield being seen in the 10yr. While we are of the opinion that 4% is the structural fair value number for the 10yr (on the assumption that the funds rate targets 3% as the next low), we also feel that this market needs a weak payrolls number on Friday to validate the move seen in the 10yr yield from 5% all to way down to sub-4.2% in a matter of weeks. The fact remains that we have not seen either a labour market recession or a sub-trend jobs growth experience. At least not yet. The market is trading as if the 190k consensus expectation is wrong for Friday and that we’re going to get something considerably weaker. The JOLTS data supports this – as does the latest Fed Beige book. But we do need to see that report before we could even consider hitting 4% on the 10yr.   Repo pressures ease, but still some cross-winds to monitor on money markets At the other extreme of the curve, the elevation in repo rates seen at the end of November that had extended into Monday of this week had begun to ease back through Tuesday. The issue here is ultra front end market rates had come under upward pressure. Extra bills issuance has been a factor, as this has both taken liquidity from the system and placed upward pressure on bills rates generally. Repo is a function of the relatives between available collateral and available liquidity and at month-end, liquidity was tied up, and that pressured repo higher. The resumed build in volumes going back to the Fed on the reverse repo facility on Tuesday proves a reversion towards more normal conditions. That said, SOFR remains elevated, and that will contribute to balances falling in the Fed’s reverse repo facility as we progress through the coming weeks. If the market is showing a better rate than the 5.3% overnight at the Fed, that should take cash from the reverse repo facility. Interestingly there was a surprise jump in usage of the standing repo facility. Not large, but it shows that in some quarters there is at least some demand for liquidity. A bit early for this to become the dominant issue, but worth monitoring all the same.   Today's events and market view The JOLTS data highlighted the markets' sensitivity to any indications of a cooling US labour market. Ahead of Friday's payrolls report, markets will eye the ADP estimate. Given its poor track record of forecasting the official data, it is likely to take a larger surprise to move valuations – the consensus is looking for a 130k reading today after 113k last month. Other data and events to watch are the US trade data and, up north, the rate decision by the Bank of Canada. On this side of the Atlantic, we will get eurozone retail sales and, in the UK, the Bank of England financial stability report. In government bond primary markets, Italy is conducting an exchange auction. The UK sells £3bn in 10Y green gilts. The main focus over the coming days and weeks will be on governments’ announcements regarding their issuance plans for next year.

Rates Spark: Science fiction? The 10Y UST yield is closing in on the 4% mark as if a weak jobs report tomorrow was a given. But underlying is also a further slide of inflation expectations. The front end is lagging, however, and being already priced aggressively for cuts, it will probably need these to become more imminent to rally further.   Rates continue to decline but the front end is lagging Market yields continued to drop with the 10y UST sinking to 4.11% and 10Y Bund to 2.2% yesterday. The driver was a weaker ADP private payrolls report, though some will point out that the correlation with the official payrolls data that is due tomorrow is actually negative. Possibly more relevant for the broader picture was the 5.2% figure for third-quarter productivity growth. It facilitated a 1.2% fall in unit labour costs, which is a positive impulse for a Fed still showing concern on inflation. Another supporting factor was a further decline in oil prices, which saw WTI fall below US$70/bbl. This picture of a reassessment of inflation as a driver does gel with a further slide in inflation swaps, in the US by more than 7bp in 2Y and close to 5bp in 10Y. In EUR the drop today was less pronounced, but the overall drop of the 2y for instance from a range around 2.65% over the summer months to now 1.8% speaks volumes. It is notable in yesterday's session that the already aggressive rate cut discount is struggling to deepen further meaning that curves are inverting more as rates decline. The US saw 2Y UST yields even rising somewhat to 4.6%. Front end EUR rates also moved marginally higher. There was some pushback from the European Central Bank’s Kazimir who called expectations of a March rate cut “science fiction”. And a little earlier, the ECB’s Kazaks, who doesn’t see the need for cuts in the first half of next year, did acknowledge that if the situation changes, so might decisions. This is what Executive Board member Schnabel had hinted at as well earlier this week. At the moment the ECB is probably just as smart as the market as it will have to rely on the data. The ECB is right to signal caution and highlight lingering risks, but trying to micro manage now may only add to market volatility.   Inflation expectations have been sliding over recent weeks   Today's events and market view The 10yr UST yield came close to 4.10% and knocking on the door of the big figure 4% yesterday, before being nudged higher overnight by a weaker 10Y Japanes government bond auction. Still, the market continues to be expecting Friday's payrolls report to be weak – the softer ADP pointed in the right direction, but markets appear to be overlooking its poor forecasting track record this time around.   There are more US job market indicators to digest today with initial and continuing jobless claims as well as the Challenger job cut numbers. The former may be subject to seasonal volatility around the Thanksgiving holiday season. In Europe we will be looking at final third-quarter GDP data as well as scheduled appearances by the ECB’s Holzmann and Elderson. In government bond primary markets the focus is on the final French and Spanish bond auction for the year. Note that in the US we are still looking at upcoming 3Y, 10Y and 30Y bond sales next week.