Originally published by Rivkin
U.S. non-farm payroll data on Friday continued to show a tightening in the labour market despite missing expectations. 156,000 new jobs were added (MoM Sep) lower than the forecast 167,000 while at the same time average hourly earnings (YoY Sep) increased +2.6% as forecast up from +2.4% previously. The unemployment rate (MoM Sep) increased from 4.9% to 5.0% however it’s not necessarily bad news as this is a result of an increase in the labour force participation rate (MoM Sep), up from 62.8% to 62.9%.
Overall despite the miss in forecasts, this is a fairly decent amount of jobs that show the labour market is continuing to tighten. It is estimated that only 100,000 new jobs per month are needed to keep up with population growth to maintain full employment. This adds further weight to the view the Fed will likely hike rates at the December meeting, but it is not strong enough to suggest any urgent action needed by the Fed at the November meeting. The focus will now turn to the release of the FOMC minutes from the September 20-21st meeting at 5am AEDT as the market looks for further evidence for a December hike.
The market reaction to the jobs report was fairly muted, bond yields on two & ten-year government debt declined -1 & -0.6 basis points respectively to +0.846% & +1.736%. The U.S. dollar index was marginally weaker, down -0.14% while equities markets were also lower the S&P500 & Nasdaq100 down -0.3% & -0.19%.
Today we have the second presidential debate between Hilary Clinton & Donald Trump at 12pm AEDT, the first chart below shows the USD/MXN which has become a sentiment gauge over the election. The Mexican Peso weakens when the market believes Trump has an increased chance of winning, this is because the U.S. is Mexico’s most important trading partner and it has the most to lose if Trump is able to enact his anti-trade policies. The Peso is +1.6% stronger against the dollar in early trade this morning with the market clearly favouring Clinton.
In the U.K. the Pound finished -1.4% lower against the U.S. dollar after an initial “flash crash” in early trading in Asian that send it plummeting as much as 6% in two minutes. There is no clear answer for why this occurred but the most logical reason seems to be a combination of illiquidity and algorithmic trading creating a bit of a perfect storm. Data from the U.K. on Friday showed that the trade balance deficit widened further month-on-month in August to £4.733 billion from £2.203 billion.
At the same time both industrial production (YoY Aug) missed estimates of +1.3% with an actual of +0.7% as did manufacturing production (YoY Aug) with an actual of +0.5% against forecasts of +0.9%. The continued slide in the GBP/USD shown on the second chart below highlights the pessimism that is being priced in as a result of politics and concerns of a “hard” Brexit. While a falling currency can help an economy by increasing competitiveness and boosting exports, too much depreciation too quickly can outweigh these benefits including faster than expected inflation that erodes savings, can reduce real wages, cause instability and reduce competitiveness.
The reaction in U.K. bond yields on Friday highlights these inflation expectations, the yield on two-year gilts gained +5 basis points to +0.179% as did the yield on ten-year gilts up +10.6 basis points to +0.979. The FTSE 100 benefited from the decline in the currency up +0.63% while the FTSE250 which tends to be more domestically focused declined -0.67%.
The Bank of England have continued to express they are willing to look through higher inflation in the short-term in order to protect the economy through further stimulus although too much depreciation in the Pound could complicate this view. The key will be the November economic forecasts, if they are unchanged from the August report then it is highly likely we will see further stimulus added by the end of 2016.
The Baker Hughes U.S. rig count (Oct 7th) increased to 524 from 522 previously as the recent gains in oil prices have continued to see more U.S. production come back online. This weighed on oil prices on Friday with both Crude Oil & Brent Oil down -1.25% & -1.10% respectively. Elsewhere Natural Gas prices continued recent gains, up +4.72% as a supply glut in the U.S. is expected to be reduced in the coming months as a result of lower output and higher demand. Commodity prices were generally lower, measured by the Thomson Reuters CRB index which declined -0.22% while precious metals spot gold & silver gained having been heavily oversold the past fortnight, up +0.18% & +1.34% respectively.
Locally the S&P/ASX 200 was modestly lower on Friday down -0.29% while we can expect a modestly higher open this morning with ASX SPI200 futures up 8 points this morning.
Data releases:
· U.S. Presidential Debate 12pm AEDT
· German Trade Balance (MoM Aug) 5:00pm AEDT
· Euro-zone Sentix Investor Confidence (MoM Oct) 7:30pm AEDT
Chart 1 – USD/MXN
Chart 2 – GBP/USD
Source: Rivkin, RivkinTrader
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.