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    IronFX Daily Commentary | 05/10/15

    05.10.2015, 10am

    Disappointing NFP is half forgotten already. Friday’s US nonfarm payrolls for September was a terrible figure – not only did the September figure come in far below market estimates, but the disappointing August figure was further revised down. There wasn’t even any solace in the fact that the unemployment rate held steady – that was only due to a drop in the participation rate as employment in the household survey fell. And the average workweek fell, too. Almost nothing good. It’s particularly worrisome when the key question the market is debating nowadays is global growth and the US is/was the one bright spot. Fed fund rate expectations collapsed as much as 10 bps in the long end and the dollar collapsed with them. The market is now expecting just barely two rate hikes by end-2016.

    • Nonetheless, the dollar quickly recouped at least half its losses, more against some currencies. EUR/USD for example shot from 1.1156 to 1.1316 in seconds, but by the end of the New York day it was back to 1.1217 – well within the recent range. USD/JPY plunged from 120.41 to a low of 118.68, but by the end of the New York day traded back around 120.00 – more or less where it had started the day. The reasons were: the figure was bad, but not that bad (the figure was within the normal range of data, which is ±76k); looking at the longer term, year-to-date payrolls are almost in line with last year (198k vs 238k); and Fed officials downplayed the report, saying it’s more important to look at the trend rather than one or two months’ figures. St. Louis Fed President James Bullard said it was “just one number” in a series “that has been improving for a long time.” (The 12m moving average of NFP, for example, is still 229k.) Boston Fed President Eric Rosengren said the weak figure validated the decision not to hike in September, but with the unemployment rate at 5.1% they could still start raising rates in December.

    • I expect the dollar to gyrate as investors ask two questions : one, how quickly is the Fed likely to hike rates (if it does at all), and secondly, is any other central bank likely to hike any earlier? There can certainly be different opinions about #1, but not #2 – nobody else is going to hike before the Fed does. That should continue to support the dollar going forward as investors reconsider the outlook.

    • In particular, I think the commodity currencies are likely to come under more pressure going forward. They’re in a lose-lose proposition: if the US hikes, then they get left behind, and if the US doesn’t hike, it’ll probably be because global growth is weak and China is in trouble, in which case the commodity currencies will come under even more pressure. Watch out for the RBA meeting tomorrow though, which could temporarily boost AUD (see below).

    • This week it will be crucial to listen to how Fed officials interpret the data. The numbers are neither here nor there; what matters is what people make of the numbers. If the other FOMC members are also focused on the trend, or if they also see it natural for the monthly addition to jobs to slow, then Fed rate expectations are likely to rebound and the dollar recover with them. We will get the hawk view on Tuesday from Kansas City Fed President George. San Francisco Fed President Williams (dove) is a busy man: he speaks twice on Wednesday and again on Thursday. St. Louis Fed President Bullard and Minneapolis Fed President Kocherlakota also speak on Thursday, which should give a nice contrast as the former is relatively hawkish and the latter is the #1 dove on the FOMC -- apparently he’s going for a rate cut this year. Finally on Friday, Atlanta Fed President Lockhart (dove) and Chicago President Evans (dove) weigh in.

    • Today’s highlights: During the European day, we get the final service-sector PMIs for September from the countries we got the manufacturing data for on Thursday. As usual, the final forecasts for France, Germany and Eurozone are the same as the initial estimates, therefore the market reaction is usually limited at these releases.

    • The UK service-sector PMI is forecast to have risen to 57.0 from 55.6. Following the better-than-expected construction index on Friday and the above expectations manufacturing PMI on Thursday, another positive surprise in the service-sector PMI looks possible.

    • In the US we get the labor market conditions index for September. This is a monthly index that draws on a range of data to produce a single measure to gauge whether the labor market is on the whole improving. Although not major market mover, the LMCI index will show the broader US labor conditions following the soft US employment report. Both the final Markit service-sector and the ISM non-manufacturing PMIs are also coming out. The market pays more attention to the ISM index. A possible decline in ISM non-manufacturing index will be in line with the decline in the manufacturing index, and could push USD lower, at least temporarily.

    • As for the rest of the week, on Tuesday, the highlight of the day will be the RBA policy meeting. At their last meeting, Bank officials kept the key policy rate unchanged at 2%, as expected. Moreover, Gov. Stevens’ comments following the meeting were almost unchanged from their previous meeting. He maintained his neutral bias and as for AUD, he simply repeated that “(t)he Australian dollar is adjusting to the significant declines in key commodity prices.” In our view, the fact that they showed no significant concern about the Australian economy despite the increased weakness in the Chinese economy and the turmoil in global stock markets, AUD is likely to benefit from another neutral statement.

    • As a result, the main focus will most probably be on the statement accompanying the decision for any comments that the moderate expansion in the economy continues and that the labour market data have been decent recently.

    • On Wednesday, the highlight will be the Bank of Japan policy meeting. Market expectations – and ours -- are for no change in BoJ policy at this meeting. The more important meeting will be the one at the end of the month, when new long-term projections for growth and inflation will be released in the semi-annual Outlook for Economic Activity and Prices report. Therefore, the focus at Wednesday’s meeting will most likely be on Gov. Kuroda’s press conference afterwards. BoJ officials said recently that they see little need for an immediate expansion of monetary stimulus and would prefer to hold off to get a clearer picture of the economic outlook. It will be interesting to see if Gov. Kuroda maintains his upbeat view that the underlying trend of inflation is improving, despite the renewed fall in core CPI.

    • On Thursday, the main event will be the Bank of England monetary policy meeting. With no change in policy expected, the number of dissenting votes is the key point again. The consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate rise. Market participants will be eager to see if McCafferty is joined by the formerly hawkish Martin Weale or Kristin Forbes, who argued that the underlying inflation should start to pick up soon and monetary policy would need to be tightened sooner. As you can see on the graph however, despite the hawkish comments recently, market expectations for BoE tightening have been pushed back, with the timing for the first rate hike now slipping from around 8 months in August (meaning the first hike to occur around March) to 12 months in September. This explains a bit the recent weakness seen in GBP.

    • In addition to the BoE meeting, the Fed releases the minutes of its September FOMC meeting. At this meeting the FOMC remained on hold, as the market had anticipated, but surprised investors by presenting a more dovish outlook than expected. The Committee did discuss the idea of hiking rates at this meeting, but decided not to because of global factors (as opposed to strong domestic factors.) Several Fed officials who spoke recently maintained their willingness to raise rates at some point this year. If the minutes show that they are likely to start hiking if the global environment calms down, then USD could regain its momentum.

    • On Friday, Norway’s CPI for September is coming out. Even though the country’s CPI is close to the Bank’s 2.5% target, low oil prices, soft industrial production and weak manufacturing PMI pushed the Norges bank to cut its key rate at their September meeting. The Bank also maintained the likelihood for further cuts, therefore, a decline in the CPI rate could put NOK under renewed selling interest. Canada’s unemployment rate for September is also coming out.


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