Overview: The US dollar has been confined to narrow
ranges today as the market awaits the October employment report. Barring a
significant upside surprise, we suspect the dollar is more likely extend this
week's losses. The Dollar Index is off about 0.5% this week. Within the narrow
ranges, it is sporting a slightly softer profile again nearly all the G10
currencies. It is also lower against most emerging market currencies, but tight
ranges dominate. Similarly, benchmark 10-year yields in Europe are narrowly
mixed. They are mostly 10-13 bp lower this week, thought the benchmark Gilt
yield is off 17 bp. The 10-year US Treasury yield that was flirting with 5.0%
recently, is near 4.65%, off 24 bp this week, ahead of the jobs report.
Asia Pacific and European equities are
higher today. Hong Kong and mainland shares that trade there jumped more than
2% to lead the region. Europe's Stoxx 600 is pushing gently higher to extend
its recovery into the fifth consecutive session. After yesterday's sharp
advance, US index futures are off to a little heavier start today. December WTI
extended yesterday's recover slightly but remains within Wednesday's range
(~$80.30-$83.40). Gold is also consolidating inside the midweek range
(~$1982-$1990).
Asia Pacific
China's Caixin services and composite
October PMI were reported. Recall that the official and Caixin manufacturing PMIs converged
at 49.5. The Caixin services PMI rose to 50.4 from 50.2 (the official
non-manufacturing PMI fell to 50.6 from 51.7). The Caixin composite was fell to
50.0 from 50.9. The official composite was 50.7 (down from 52.0 in September).
In some important ways, it does not matter. Beijing is engaged in two
simultaneous movements. More support for the economy and more control for the
Chinese Communist Party.
Increased speculation that the Reserve
Bank of Australia could raise rates as early as next week helped the Australian
dollar to its best level since late September. However, today's reports are a good
reminder that the economy is weakening, and it follows yesterday's report that
showed that exports fell for the third month in September in the past four.
Earlier this week, the final October manufacturing PMI was reported at 48.2,
matching the lowest since April. Today, the final service PMI came in at 47.9
from the initial estimate of 47.6, down sharply from the 51.8 in September. The
composite PMI stands at 47.6, slightly better than the 47.3, but it still the
low print this year. Separately, and more constructively, Australia reported
that after adjusting for inflation, retail rose by 0.2% in Q3. Real retail
sales had fallen in the past three quarters.
The dollar's low against the yen, near
JPY149.85, just above the 20-day moving average, was recorded shortly after the
US reported stronger than expected Q3 productivity and an outright fall in unit
labor costs. This
undermined argument that about wage growth driving inflation and spark a rally
in the long end of the US curve. The US 10-year yield that poked above
5.0% on October 23, recorded its low at about the same time as the dollar did
against the yen. Near 4.62%, the 10-year yield reached nearly three-week low
and returned to the middle of the yesterday's range. Today, ahead of the US
jobs report, the dollar is confined to an exceptionally narrow range of about
JPY150.25 to JPY150.55. The Aussie is also in a tight range today, holding in
the upper end of yesterday's range, though below $0.6450. The Australian dollar
peaked yesterday near $0.6455 in early North American turnover and pulled back into
support near $0.6415. It took out the October high (~$0.6445) but failed
to close above it. Similarly, it breached the upper Bollinger Band (~$0.6435) but
settled inside it. The greenback edged higher against the Chinese yuan
but did not move off the CNY7.31 handle for the seventh consecutive session. The
PBOC set the dollar's reference rate at CNY7.1796, little changed from
yesterday. The average in Bloomberg's survey was for CNY7.3134 (up from
CNY7.3030 yesterday). The dollar is slightly softer on the week after the
settling (slightly) higher for the past three weeks.
Europe
September unemployment in the eurozone ticked up to 6.5% from 6.4% It has
been bouncing between 6.4% and 6.5% since the end of Q1 23. It has not been
lower during the EMU era. Still, an important takeaway from this week's activity is
that the swaps market has brought forward the first rate cut. There is now
about an 80% chance it takes place by early Q2, with two cuts nearly fully
discounted by the end of July. By the end of next October, the swaps market has
three quarter-point cuts discounted and has begun edging toward a fourth cut.
The Bank of England left policy steady
(6-3 vote), as widely expected. It offered a more dour economy outlook. It now looks for Q3 GDP,
which will be reported on November 10, to be flat (in August it projected 0.4%
growth) and for the economy to grow by 0.1% in Q4. The BOE sees the economy
stagnant next year rather than growth by 0.5% as it anticipated three months
ago. Bank of England Governor Bailey warned of a sharp fall in October CPI. UK
inflation is the highest in the G7. Recall that in October 2022, CPI jumped by
2.0%. As this drops out of the 12-month comparison, the headline rate can fall
toward 5.2% or so. It will be reported on November 15. Bailey argues it is too
early to consider rate cuts, but not for the swaps market, which has almost a
quarter-point cut discounted for August 2024. Separately, the final services
and composite PMI were slightly better with the preliminary readings of 49.5
(from 49.2 initially) and 48.7 (from 48.6), respectively.
The euro peaked a little short of $1.0670
shortly after the US economic data. The buying dried up in front of the week's high that was
recorded on October 31 at $1.0675. Still, new bids emerged on the pullback
ahead of $1.06. We note that the five-day moving average crossed above the
20-day moving average on October 20, and although they reconverged in recent
days, yesterday's euro rally help widen them out again. Subdued trading today
has kept the euro in a tight range (~$1.0615-$1.0650), though better bid in the
European morning. Despite the BOE's dour forecast, sterling did set a new
high for the week near $1.2225. On the pullback, it held above
$1.2160. It has held above $1.2185 today, but below $1.2215. The trendline
connecting October's two highs comes in near $1.2260 today. Last week's high
was around $1.2290.
America
The US reported a 4.7% rise in Q3
productivity (after the upwardly revised 3.6% in Q2) and a 0.8% decline in unit
labor costs (vs. median forecast in Bloomberg's survey for a 0.3%). It illustrates another dimension, and an
important one at that, of the labor market besides the number of people working
or collecting unemployment benefits. To Fed Chair Powell's point that
while the PCE deflator, which the Fed targets, is a fair measure of inflation,
the state of the labor market cannot be captured in a single number. Also,
consider weekly initial jobless claims at 217k are low by any reckoning, but
continuing claims rose for the sixth consecutive week and at nearly 1.82 mln
are the highest since April.
Today's nonfarm payroll report is front
and center. The 336k
increase in September was a bit of a statistical fluke and overstates the
strength of US job growth. The median in Bloomberg's survey is for 180k
increase today. Of course, the September gain is subject to revisions today. As
we noted when the data was published, on a seasonally adjusted basis, the US
lost full-time jobs every month in Q3, though the BLS says that almost 800k
jobs were created after a little more than 600k in Q2. Through September, job
growth has averaged 266k a month. In the first nine months of 2022, the average
monthly job gain was 438k. Average hourly earnings (which capture some
imaginations but is why productivity is important and why unit labor costs are
a better reflection of competitiveness) may have slowed to a 4% year-over-year
pace. If true, it would the slowest rise in June 2021.
Canada also reports on last month's labor
market. In
aggregate, it looks like the Canadian labor market is in good shape. Through
September, it created an average 43k jobs a month, over which 27.2k have been
full-time positions. This is better than the first nine months of 2022, when
Canada created an average 27.2k jobs of which 29.3k were full-time. Still,
there has been a marked deterioration in recent months. In the past three
months, overall job growth slowed to an average of about 32.4k a month, and
full-time job growth has slowed to about 16.5k a month. If one were to simply
add the monthly GDP prints this year through August, the sum would be zero.
There is increasing speculation that Canada is slipping into a recession (two
consecutive quarters of economic contraction). Canada's two-year yield peaked
near 5% in the second half of September and early October. Yesterday, it dipped
below 4.50%, a three-month low. As recently as October 9, the swaps market was
pricing in another quarter point hike before next July. Now it has a cut of the
same magnitude fully discounted.
The Canadian dollar rallied
about 0.85% yesterday, its biggest advance in a few months. It was not driven by Canadian developments
but by the general pullback of the US dollar. After stalling 1/100 of a
Canadian cent below CAD1.3900 on Wednesday, the greenback slumped to almost
CAD1.3735 yesterday. It extended the losses to slightly below CAD1.3730. On the
top side, it found offers near CAD1.3760. Nearby support is seen around
CAD1.3715-20. There are about $2.55 bln in options that expire today between
CAD1.3700 and CAD1.3705. The daily momentum indicators are stretched and appear
to be turning lower, but a weak jobs report could encourage new Canadian dollar
offers. Meanwhile, the greenback extended its sell-off against the
Mexican peso for the sixth consecutive session yesterday, reaching nearly
MXN17.51. Follow-through dollar selling today has been limited to
about MXN17.5060. It finished last week near MXN18.1140 and is up about
3.3% this week, the second-best emerging market currency behind the Chilean
peso's 5% gain. The convincing break of MXN17.75 suggests a potential double
top is in place from last month in the MXN18.4660-MXN18.4860 area. The
measuring objective of the double top projects back toward MXN17.00. Ahead of
that, the MXN17.33 area is a (61.8%) retracement of the dollar's rally from the
July low near MXN16.6260. That said, the abruptness of the move has seen the
greenback fall well below the lower Bollinger Band (~MXN17.6850), which
cautions against chasing it lower immediately.
Reviewed by Marc Chandler
on
November 03, 2023
Rating:
