Look Through the US Jobs Report

Traders are putting the final touches on
another strong weekly performance for the US dollar. 
 Strong economic data, including the PMIs, auto sales, and factory orders have
surprised to the market.  The ADP
report warns that the storms that flattered some high frequency data will likely skew today’s employment report
(both headline and details) to the downside.  Of course, investors will
quickly look for the number of people who could get to work due to the weather.
Nevertheless, never to
get too caught up with facts, regardless of the actual report,  investors
will look through the report. 
 It is an unusual
set of circumstances that allow us to say the non-farm
payroll is unlikely to have much impact on expectations for Fed policy.
 The market is going into the report having
assessed about a 74% chance according to our calculations, which is similar to
Bloomberg’s estimate, but below the 80% in the CME’s  analysis.
It is not simply
a strong dollar story, but it is a weaker sterling and euro as well.
 The tensions between Catalonia and
Madrid remain intense.  A declaration of independence would likely force
Madrid to suspend the local government and govern the region directly.
 Many years ago, Montreal was the financial center of Canada, but the
threat of Quebec secession saw a shift towards Toronto.  Already one of
the large banks in Catalonia has raised
this possibility in Spain.  The Constitutional Court suspended next week’s
the regional parliament session next week in Catalonia, where independence
could be declared.    
Spanish assets continue to
10-year yield is up nearly five basis points today to 1.73%, which is
essentially the move for the week.  The premium over Germany widened this
week to five-month highs near 130 bp.  Two months ago,  Spain’s
premium was less than 100 bp.   Spain’s bourse is off 
2.2% this week, while the Dow
Jones Stoxx 600 is up about 0.6% this week.  Moreover, the economy is
doing well.  The strength in the recent PMI
has been followed by a better than expected industrial output report.  The
1.0% rise in August snapped a two-month decline.  The median forecast from
the Bloomberg survey was for a 0.2% gain.  
Sterling’s slide has
accelerated this week.
  In fact, sterling is
having its worst week in a year shedding about 2.5%.  It is not due to a shift in interest rate
expectations.  The implied yield on
December short sterling futures contract has eased single a basis point.  
Sterling fell by more than three cents.
 It was recovering from the losses spurred the
face of weaker than expected manufacturing and construction PMIs, when May gave a milquetoast speech at her
party’s conference.  Recall too that as of last September, speculators had
a net long sterling position in the futures market for the first time in two
years.  The late longs were in weak hands.   
There is a rebellion within
the Tory Party.
  Shapp, the former Tory Party Chair reportedly
has a list of colleagues who want a new leader.  Reports suggest there are
presently around 30 Tory MPs on the list, including several former cabinet
officials and cuts across the Brexit divide.  
After sterling,  the
Australian dollar is the weakest of the major currencies today, following
comments from RBA board member Harper who explicitly refused to rule out
another rate cut.
recent string of Australian data, including this week’s retail sales report,
have been disappointing,  The Aussie’s losses extend the downdraft for the
fourth consecutive week.  It is trading near three-month lows to flirt
with the 50% retracement objective of the rally in since the May low of about
$0.7330.  The retracement is seen
near $0.7725.  The 61.8% retracement is a cent lower, while the measuring
objective of the potential double top is nearer $0.7500.  
Barring a strong rally in
North America, the euro will finish lower for the second consecutive week.
  It would be the first
back-to-back decline in six months.  The price action confirms our
suspicions that the short-term market has changed to sell euro bounces rather
than buy dips. If the euro finish the
week below $1.17, it would be the first time since late July.  The
mid-August lows were recorded near
$1.1660, and we have suggested that a potential head and shoulders pattern
projects toward $1.1600.  
To be sure,
barring the lowflation
the eurozone economic activity remains elevated.
 That was the takeaway from the PMIs.  Germany reported a surge in August
industrial order today.  The 3.6% rise is the strongest in three years.
 This is a seasonally and inflation
adjusted.  The strength was broad-based,
with domestic orders increasing 2.7% and export orders rising 4.3%. Today’s
report suggests upside risk to news week’s industrial output report, where the
median is expecting a little less than a 1% increase.  
As the snap-election draws
near (October 22), Japanese politics also comes into focus.
  Today, the Party of Hope
unveiled more of its economic program.  It was already known to oppose the
retail sales tax increase slated for 2019, and for phasing out nuclear power
(by 2030).   What is new today is the possibility of taxing cash reserves
of Japanese companies, which are estimated
at around $2.7 trillion.  It sought to reassure investors that it would
retain the extremely easy monetary policy, and work with the BOJ for a smooth
Japanese shares closed
higher today, and the Topix has extended its advancing streak for a fourth
consecutive week. 
is the longest such rally since May.  Separately, the MOF reported that
foreigners were buyers of Japanese equities last week for the first time in
three months.  
Like the US, Canada will
also report its September employment figures today.
 The median forecast expects Canadian
job growth to slow to 12k after a 20k increase in August.  In the first
eight months of the year, Canadian employment rose an average of 27.4k a month.
 Last year’s average was 19k.  Wage growth, of course, is also important, but the bottom line
is that barring a surprisingly strong report, expectations for a hike later
this month (Oct 25) are unlikely to rebuild.  
Over past few weeks,
expectations for another rate hike have fallen
but also pushed from this month to the Dec 6 meeting.
  Consider, extrapolating from
the OIS, Bloomberg estimates that there is an
18% chance of an Oct hike and a
65% chance of a hike before the end of the year.  Three weeks ago, the
market was pricing in a nearly 50% chance of a hike this month and a 68.5% chance
of a hike before the end of the year.  The US dollar recovery against the
Canadian dollar continues, and this has
been the fourth consecutive weekly advance.  This is the longest such streak since last November.  
Several large options are
set to expire today, which may impact activity. 
Struck at $1.17, there are 1.3 bln euro options that
roll-off today, and between $1.1735 and $1.1750, there are options for another three bln euros.  On the downside, there are nearly 1.7 bln euros struck between $1.1650
and $1.1665. There is a $765 mln option struck at JPY113 that will be cut
today.  There is an A$1.4 bln option
struck at $0.7800 that may be fading of importance as the Aussie breaks down.
 There is a nearly GBP300 bln option struck at $1.3090 that is now in the money, with sterling falling to around
$1.3060 earlier.  

Lastly, note that the rating
agencies will be busy today.  DBRS is set
to update its assessment of Spain.
  Moody’s is expected to provide
a new assessment of Italy, and S&P reviews France and Saudi Arabia.  


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