US Jobs Data Takes Center Stage

Highlights
The US dollar is firmer amid last minute positioning just ahead of the employment data.  With another round of asset purchases continues to seem probable, even though FOMC voting member Bullard and non-voting Dallas Fed’s Fisher indicated it is not yet a done deal.  Underlying sentiment is extremely dollar negative.  In fact, the extreme sentiment readings and achievement of key levels, like $1.40 in the euro, $1.60 in sterling and JPY82 against the yen, is making the dollar bears uncomfortable going into the jobs report and the weekend G7/G20/IMF meetings.  While one must suspect a poor figure has been discounted, after the dismal ADP report, the failure to sustain the downward pressure on the dollar could be the first sign that that bears are getting tired.  That said, short-term interest rate differentials between the US and Germany, which have been tracking the euro-dollar movement, is still struggling to stabilize, suggesting that dollar bounces will likely continue to be short-lived.  In addition, Canadian employers unexpectedly cut 6,600 positions in September, although the unemployment rate fell as people left the workforce.  The employment data stoked a sell-off in CAD. 

Asian stocks slipped back on concern about earnings after poor earnings this week from Samsung and Seven & I, Japan’s biggest retailer. The MSCI Asia Pacific index slipped 0.9% overnight, though that still leaves it up 1.5% over the past five days.  Japan’s Nikkei slipped by 1%, meanwhile there were declines for benchmarks in Taiwan, Korea, Australia, India and Singapore.  The slide is the Nikkei was led by a more than a 1% decline in consumer services and technology.   Chinese markets ended their week-long holiday with gains of more than 3% for both the Shenzhen and Shanghai indexes, stoked by the rumors of a Moody’s upgrade.  Although, it appears the markets were just playing catch-up after their brief hiatus.

Moody’s put China’s debt on rating on review for a possible upgrade.  The rating review affects the government’s A1 foreign and local-currency bond ratings.  Otherwise, bonds were steady overnight. Treasuries are set for their fourth gain in four weeks as concern about US growth builds, although after Bullard’s comments this morning the yields on 2- and 10-year were up 1bps. The 10-year yield slipped 13 bps this week to 2.38%, down from 2.79% on September 9. Yields on 2-year notes in the US slipped 6bps this week to 0.35%, while Japan’s 2-year notes fell just 1bp. European bonds were mostly flat this week, with a small downtick in yields. German’s 10-year bund yield was unchanged on the week, as some of the periphery debt performed well. Greece’s 10-year yield dropped 39bps on the week, while Spain’s yield declined 9bps. In contrast, Irish yields rose 9bps.

Currency Markets

The US jobs data is likely to determine whether yesterday’s price action, which saw the dollar reverse to recoup its earlier losses than saw it make new multi-month lows against sterling and the euro, new multi-year lows against the yen and new record lows against the Swiss franc, is the beginning of a corrective/consolidative phase.  The dramatic slide of the dollar over the past month has taken place with very few counter-trend days.  In fact, out of the 19 sessions through yesterday, since the recent low was recorded on Sept 10 near $1.2644, the euro has declined in only four of those sessions.   This has left the market over-extended.  Sentiment readings also appear at extreme levels.  It is possible that the 1% pullback seen in the euro and sterling after the $1.40 and $1.60 levels were briefly breached yesterday could simply be the first leg of the correction.  In terms of fundamentals, we identified the move in short-term interest rate differentials against the US as the key driver.  These have continued to trend against the dollar this week, but with the 2-year US Treasury yield near 35 bp, much of the impact of the expected asset purchases appear to have already been discounted.    Yet given the pace of the dollar’s slide, many will be inclined to chase the market and raise the forecasts for the foreign currencies.   Since early September as it became clearer (to us) that QEII was likely we had suggested the scope toward $1.40 for the euro and $1.60 for sterling.  Additional gains cannot be ruled out, but these may be better captured by momentum and other short-term traders.  Medium and longer-term investors and other value traders should be wary of chasing the market. 

Japan reported a somewhat smaller than expected August current account surplus.  This is noteworthy in its own right as the balance of payments trade surplus narrowed to JPY195.9 bln from JPY916 bln in July.  However, it is also a useful reminder of the changing composition of Japan’s current account surplus, which is important within the context of the talk of currency wars and competitive devaluations to boost exports.  Nearly the entire JPY1.11 trillion current account surplus can be accounted for by the income surplus.  In addition, some details of its capital account were reported and it turns out that China turned to a net seller of JPY2 trillion of Japanese debt instruments.  Actually after buying larger amount of Japanese bills in the May-July period, they were net sellers in Aug.  China had been sellers of medium and longer term paper (e.g. sold JPY57.7 bln in July) turned to the buy since in August (JPY10.3 bln).  The MOF data also suggests that Japanese investors bought JPY2.2 trillion of US Treasuries in Aug after purchasing JPY3.5 trillion in July. 

The UK’s September producer prices increased more than economists forecast as raw materials jumped, feeding inflation into the economy.  With the MPC desperately trying to maintain a balance between medium-term inflation and balancing the economy, the September data made the juggling act that much harder.  In fact, both input and output prices were stronger than expected.  The input prices rose by 0.7% m/m versus a consensus forecast of 0.4%, and upward revisions to the back data meant the annual inflation rate stood at 9.6% y/y in September, versus a consensus forecast of 8.6%.  In addition, headline out prices rose by 0.3% m/m – versus a consensus of 0.1% – meanwhile core output prices ticked up by 0.4% m/m – versus a consensus of 0.2%.  The producer-consumer pass through is hard to gauge but there are two simple options for companies to take.  One, they can pass the cost of inputs on to the consumer, stoking a rise in CPI.  Or two, they can eat the rise in inputs, thereby reducing profits.  In the case of the latter equity valuations will take a hit as earning and company profitability suffer.  Overall, subdued growth would support Posen’s case for further unconventional policy and yet the BoE is technically an inflation targeter so at the core it will continue to maintain its bias towards price stability. 

Upcoming Economic Releases
At 8:30 EST / 12:30 the US reports September’s unemployment report.  The consensus is for the unemployment rate to tick up to 9.7% from 9.6% the previous month.  Private payrolls are expected to increase by 75k, a 15% increase from the previous month.  Furthermore, with the final wave of census workers leaving the books nonfarm payrolls are expected to drop by 5k, although that would be an improvement from last month’s decline of 54k.  In Canada, September’s housing starts will be reported at 8:15 EST / 12:15 GMT with the consensus calling for a slight decline to 179K from 183K.