Market Strategist
Summary: US nonfarm payrolls boosted hopes of a US soft-landing and Fed rate hike bets continue to be pared. This could setup for a near-term downside in the US dollar until weakening economic momentum prompts Fed rate cut bets later in the year. While yen and yuan could be the biggest beneficiaries of the slowing dollar upmove, these could be expensive to short the dollar due to the carry. AUD could extend upside if China sentiment continues to be repaired and RBA leaves the door open for tightening vs. Bank of Canada which has little scope to go for a hawkish hold. Gold is also making a fresh attempt to break higher.
The US nonfarm payrolls increased by 187k in August, coming in above the 170k expected. But the last two months saw a net downward revision of -110k, suggesting data remains prone to downward revisions. The unemployment rate edged up to 3.8% from 3.5% in July and wage growth moderated with average hourly earnings growth of 4.3% YoY slowing from July’s 4.4%. The downward revisions in prior months’ data have erased any scope of a hawkish surprise coming from the headline print. Also, slowing wages and the increase in unemployment rate, although still modest, is also another sign of loosening in the labor market, leaving little scope for the markets to expect any more rate hikes from the Fed.
The household survey, which is used to calculate the unemployment rate, shows that an increase in labor force was one of the key factors driving the increase in number of unemployed persons. The labor force increased by 736k as per this survey, with 222k gain in the number of employed, resulting in 514k gain in the number of unemployed. This meant labor force participation jumped to 62.8% from 62.1% a year ago, and this should also help to keep wage pressures in check. Worth noting however, that increased labor force participation can suggest dwindling household cash balances as pandemic savings start to run out – another signal that consumer spending could be constrained in Q4.
Data over the next few weeks, including this week’s ISM services print for August, will likely continue to support the case for no further rate hikes from the Fed. However, Q3 data will still be supported by one-off spending items such as entertainment spending, and unlikely to show a marked deterioration in economic momentum for now. This means soft-landing hopes could continue to gain traction for now, which could be bearish for the dollar. Deeper recession or stagflation concerns, or a safety bid for the dollar, will have to wait for more evidence of a downturn in the US economy. Central bank narrative, meanwhile, will also shift towards the scope of rate cuts from the potential for more rate hikes. Growth differentials, therefore, could be a key driver in the next phase of the cycle.
Emerging markets have been the first movers in the easing cycle, with Chile and Brazil having announced rate cuts. However, the rate cut path may remain slow, despite a hefty start, amid Fed’s higher-for-longer message. Historically, the Fed is quicker and more aggressive to cut rates and that also leaves the dollar prone to some downside. The sticky core inflation issue in the UK and Eurozone suggest that BOE and ECB will likely work with a lag in the easing cycle, although how quickly economic data in Europe and UK turns sour will have to be on watch. Also, dollar’s carry advantage continues to offset concerns of a decline, but gold upside is likely as Fed pause expectations get entrenched.
Canada’s Q2 GDP unexpectedly fell by 0.2% QoQ, falling well below the central bank’s expectation of 1.5% gain, and suggesting that the risks for the Bank of Canada meeting this week may be titled dovish and support for the CAD may be tough to come by even if oil prices continue to rise.
Australia’s July CPI slid below 5% for the first time since early 2022, and July labor data was also weaker-than-expected. This has strengthened the case for a pause from the Reserve Bank of Australia (RBA) at Tuesday’s meeting. But the RBA may still need to leave the door open at this week’s meeting for some more tightening amid risks of another spike in CPI later in the year. AUD may remain supported with a hawkish hold, as long as the positive risk sentiment continues and further focus from China on supporting the yuan and its economy.
If near-term yields continue to go lower as Fed rate hike bets are pared, that could be a setup for a recovery in the Japanese yen. Lack of upside momentum in USDJPY above 145, despite no signs of verbal intervention, indicates that traders are wary of intervention risks. Meanwhile, speculation is rife for another tweak at the September Bank of Japan meeting after sluggish demand at the 2-year auction last week. Focus this week will also be on the auctions for 10 and 30-year Japanese government bonds (JGBs), and lower demand could signal that market participants are staying on the sidelines in anticipation of rising yields.
Government reports have also been suggesting progress on exit from deflation and Japan’s output gap, a measure of demand and supply, turned positive for the first time since Q3 2019 as per the Cabinet Office report on Friday, suggesting demand is outstripping supply. These inputs continue to fuel further speculation of a BOJ tweak in September. While that could bring a breathing room for the yen, cost of carry still remains a key issue for USDJPY bears.
China’s PBoC announced a 2%-pt cut in reserve requirement ratio for foreign currency deposits (FX RRR) to 4% effective September 15. While this could help to slow the slide in yuan, it may not be enough to reverse the path given the risks around China’s debt and property sector. There are some signs of a turnaround in China sentiment in the short run, from stimulus measure being touted to be “too little, too late” earlier to now indicating a clear commitment to prop up the economy and the yuan. China’s Caixin manufacturing PMI also returned to expansion in August, and data this week could show a surge in loan growth.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
