Monday Blues: Dollar Mostly Softer, Equities Firm

The US dollar's recovery gains following the drop in response to the poor jobs data have been pared, except against the yen.  There the greenback extended its gains toward JPY120.25, with the help of weak Japanese data, and speculation that the BOJ will revise down inflation forecasts this week, setting the stage for an expansion of QQE later this month.  

Japan reported weaker than expected wage growth and a drop in the services PMI.  Total cash earnings for 0.5% in August.  The market had anticipated a 0.6% increase after a 0.9% year-over-year pace in July.  The main cause was a decline in bonus pay from 1.7% to 0.6%.  Regular pay rose 0.5% and overtime 1.5%. Real wages rose 0.2%, slowing from 0.5% in July.  The relatively tight labor market condition in Japan is not fueling upward pressure on wages.  Separately Japan service PMI fell to 51.4 from 53.7. 

The dollar encounters resistance near JPY120.40, last week high.   Support is seen near JPY119.80.  The Nikkei gapped higher in response to the US equity market recovery before the weekend.  The technical indicators show a bullish divergence by not confirmed the low from last Tuesday. 

Europe's service PMIs were also disappointing, except France.  The French service PMI rose to 51.9 from 51.2 in the flash reading and 50.6 in August.   The German service PMI slipped to 54.1 from 54.3 flash and 54.9 in August.  The service PMI in Italy and Spain slipped more than expected.  Italy's eased to 53.3 from 54.6 in August.  The market expected 54.1.  Spain's fall to 55.1 from 59.6 in August.  The consensus was for 58.7. 

The UK service PMI fell to 53.3 from 55.6, a new 2.5 year low.  The Bloomberg consensus was for a small improvement.  Separately, Sweden was also an exception.  Its service PMI rose to 57.0 from 52.4.  However, what it is motivating the unorthodox monetary policy by the Riksbank is deflation more than weak growth.    The September inflation figures are due October 13.  In August, the CPI was -0.2% year-over-year.  

The euro had rallied to almost $1.1320 after the US jobs data.  It was then sold off to $1.1200.  The intra-day  technicals warn that the euro is unlikely to sustain a break of that area without at least a pullback first.   Sterling briefly traded above the post-jobs high (~$1.5240) but was pushed back to around $1.5175.  A move above $1.5250 could spur a move toward $1.5300-35 ahead of the BOE meeting later this week. 

The center-right coalition in Portugal appears to have been returned to office, but without a majority.   The left-of-center parties garnered over 50% of the vote, but the Socialists, the main opposition party, has rejected a leftist coalition.  In recent years, the Socialists have moved toward the center.  The minority center-right government is likely to find support among the Socialists.   Portugal's benchmark 10-year bond yield is up a little more than 3 bp, in line with the rise in German bund yields, but a little more than Spain and Italy.  The local stock market's 2.3% gain is in line with the regional benchmarks.

The dollar-bloc is firm.  The pre-weekend gains were extended.  The market is pricing in a little less than a one in three chance of a cut tomorrow.  We suspect this is being trimmed, which could lift the Aussie toward $0.7150.  The service sector PMI was softer at 52.3 from 55.6, but the job advertisements rose 3.9% in September from an upwardly revised 1.3% (was 1.1%) in August.  The US dollar is extending its losses against the Canadian dollar for the fourth consecutive session.  With the CAD1.3080 yielding, the next target is CAD1.30. 

The US calendar is light.  The busy week of Fed-speak begins off slowly, with nothing now until tomorrow.  The service sector ISM is the highlight, and it is expected to have eased to a still healthy 57.5 from 59.0.  The Fed's Labor Market Conditions Index may draw more attention after last week's disappointing jobs data.   It is expected to have softened to 1.4 from 2.1.  The low seen in March and April was -1.0/-0.8 respectively.   The key to the dollar's performance in North America may be whether the stock market holds on to its pre-weekend recovery gains. 

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