US Jobs Data–Higher Anxiety, Thank You Mr. Fischer

The US dollar is little changed ahead of the job report.  Our
near-term bias is for a lower dollar.   Sterling is flat and is holding on
to about a 1% gain this week.  The Japanese yen is about a 0.3% lower and
is off 1.7% this week.  The euro was coming into today for the week.

The South Korean won is the strongest among emerging markets, rising 0.4%
today, recouping a little more than half the week’s decline.  
The rand is
little changed, nursing a 1.5% decline this week.  The Brazilian real is
flat on the week that saw the president impeached and the central bank leave
rates steady.  

The MSCI Asia-Pacific Index posted a minor gain to extend
the advancing streak to four sessions.  European shares are mostly higher,
with the Dow Jones Stoxx 60 up 0.5% near midday in London.
 Financials are
down fractionally after losing their upside momentum yesterday.  Core bond yields are higher, and the long-end of the
Japanese curve were particularly hit, with the highest yields in a few months
being seen.
 The ostensible cause is
suggesting the BOJ may look to steepen the curve, which may mean
scaling back the purchases of long-dated bonds.  Oil is finishing its
worst week since January with on flat note.  Brent and WTI are off a
little more than 8% on the week.  

The US jobs report is the single most significant economic piece of
economic data in the monthly cycle. 
It is understood as a key barometer of the world’s largest
economy.  The Federal Reserve’s dual mandate (really three, if one
includes financial stability) puts full employment alongside price stability.   

At Jackson Hole, the Vice Chairman of the Federal Reserve informed the
market of two things.
  First, the Chair was not signaling a shift in
the central bank’s stance.  She was not prejudging and ruling out a
September hike or scaling the back the June dot plot to one hike rather than
two.  Second, that given this,  Fischer instructed, watch today’s
employment report.  

As it turns out, for the last five years, the August job growth has been
reported below expectations. 
The average miss is 49k, with a range of
11k-88k.  The median is 44k.    Newswire surveys are picking up a median guesstimate of
175k-180k.   If we pretend that this is statistically significant,
and subtract the average/median miss from today’s expectation, the result of,
say, around 130k, would likely be seen as a disappointment.  The average
this year is about 186k.   

The September Fed funds futures closed yesterday implying a yield of 41.75
The way We calculate it
suggested this is equivalent to about a 26% chance.   
Bloomberg’s estimate is 34% chance.  Here is a major difference.  We are using the average effective fund’s rate over the last several weeks of 40
bp.  Bloomberg’s calculation is based
on where Fed funds closed the month of August, which is 30 bp.  However,
in fairness, Fed funds often drop at the end of a month and then return to
where they were before.  

Assume then that Fed funds average
40 bp for the first 21 days in September,
and the Fed hikes 25 bp, and then Fed fund averages 62.5 bp for the remainder
of the month.
  The average rate for the month, which is what the
contract settles at is a straightforward calculation: 
((21*40)+(9*62.5))/30.  The product is 46.75, which is fair value if the
rate hike hiked.   If the Fed does nothing fair value is 40 bp.   The
contract implies 41.75.   That is 1.75 bp of a possible 6.75 bp (to
get to fair value from the current Fed funds) or 25.9%.  There is no
meeting in October, and if we look at that contract for confirmation, it is
implying a 26.7% chance that Fed funds target will be 50-75 bp then.  

The US also reports the July trade balance and factory orders, but they will be overshadowed by the jobs report
Yesterday’s news of a dramatic slide in the manufacturing ISM was a blow that weighed on the dollar.  When
we look at the history of this time series, there are seemingly inexplicable one-month moves that do not portend anything
significant.  We argued this was the case with the May jobs report.  

The real takeaway here in Q3 is not that the economy is veering into a
recession, though of course those cries can be heard. 
Rather, this
quarter is likely to snap a nine-month period of sub-two percent growth. 
The composition of growth is changing, and as the auto sales hinted,
consumption is pulling back after its second strongest quarter since the end of
the Great Financial Crisis.   Investment
looks stronger.
  Trade and inventories will likely be less of a
drag.  Government spending may also add rather than subtract from Q3

Outside of the US, the one economic data point that drew attention was
the UK’s construction PMI.  It jumped to 49.2 from 45.9 in July. 

This was better than expected and follows
the record jump in the manufacturing PMI seen yesterday.    
Although the construction PMI is not above the 50 boom/bust level, it does seem
like the initial shock has dissipated, at least in part due to the drop in
sterling and UK rates.   The risk is that the service PMI does not do
as well as the manufacturing PMI, which will be released
on Monday.  Services are less impacted by
the decline in sterling

Later today, Spain will hold a second confidence vote for Rajoy and his
minority coalition.
  He needs a plurality and is unlikely to secure
it.    Pundits can joke about how well the Spanish economy has
performed with only a caretaker government for the past eight months, but it is
misleading.  The economic momentum is easing.  It is at loggerheads
with the EU on fiscal policy and needs to
submit the 2017 budget draft to the EU next month.  It needs to do more
than simply rollover this year’s spending plans.  On a cyclically
adjusted basis, Spain’s deficit has grown for the past two years.  There
are also practical issues.  The chief market regulator’s term expires next
month.  The caretaker government is not authorized to name a

Over the weekend is the G20 meeting.  We do not expect fresh
initiatives.  Look for some discussion of UK intentions to trigger Article
50.  The US-EU clash over corporate taxes is likely to air as well. 
We note that ahead of the meeting, hosting by China, the yuan has firmed
against the PBOC’s reference basket to flirt with a multi-month
downtrend.  Ahead of the October 1 inclusion of the yuan in the SDR, it
looks like officials want to engineer greater stability.  

Also, the Germany state of Mecklenburg-Vorpommern holds elections Sunday. It has been run by a Social
Democrat-Christian Democrat coalition since 2006.  The latest polls have
the Social Democrats with a slightly lead near 28%, while the Merkel’s CDU and
the anti-immigration and anti-EMU AfD are running in a statistical dead heat.   Merkel, whose district is
in this state, has tacked to the right and campaigning more on
law-and-order.  There is some talk that ahead next year’s national
election, Merkel may endorse a tax cut.  It would be nice to have a hint
of this at the G20 meeting, but it does not seem very likely.  



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