Written by Convera’s Market Insights team
Ambiguous data ahead of job report
Boris Kovacevic – Global Macro Strategist
Global markets whipsawed on mixed economic data ahead of the important US labor market report due later today. The Greenback continued to follow bond yields lower this week as signs are mounting that US economic momentum is slowing. However, we noted that this trend has not been linear, and that this ambiguity has somewhat slowed the dollars decline. It will now be up to the non-farm payrolls report to decide the fate of the dollar and broader markets.
The consensus expects an improvement in job growth compared to last month months weak 116k print that triggered a global market sell-off and unwinding of the carry trade. Expectations are diverging on the path of the unemployment rate in August (4.3%). A slowdown to 4.2% would probably strengthen the case for a 25 basis point cut in September. However, should the jobless rate rise by 10 basis points, we expect market pricing to shift to a 50 basis point cut. Going into the job report, 2-year Treasury yields are near their 2024 lows and the dollar is down 5% from its April peak and slightly negative on the year.
Looking at yesterday’s news flow, the ISM PMI and ADP employment report came in mixed. The US service sector stayed in expansionary territory in August (51.5) but the medium-term downside trend continued. Most sub-indicators from new orders to employment improved. However, with the headline index as close to the 50 mark dividing contraction from expansion, the positive surprise in August did not do much to calm investors nerves with the job report coming up. This holds true especially against the backdrop of the weaker ADP report. Private hiring fell from 111k to 99k in August, recording the fifth monthly slowdown.
French PM announcement soothes investors
Ruta Prieskienyte – FX Strategist
The euro briefly rallied to $1.112, extending its week-to-date gains to 0.5%, driven by another set of soft US labour market reports. Overnight EUR/USD implied volatility ahead of today’s US NFP report reached 13.87%, an 18-month high, as investors grow increasingly anxious, with this data likely to determine the pace of Fed rate cuts in less than two weeks. European bonds gained for the third consecutive day, marginally outperforming US Treasuries. The front-end Bund rate fell below 2.29%, a near two-year low, and the 2-year DE-US spread narrowed to 142.9bps, the smallest gap in nearly 16 months, supporting the euro.
In a positive economic surprise, German factory orders unexpectedly rose for the second consecutive month, with demand in July increasing by 2.9% month-on-month, compared to market expectations of a 1.7% decline. However, this uptick was driven by large-scale orders; excluding these, the gauge would have fallen by 0.4%. The industrial sector of Europe’s largest economy remains under pressure due to weak foreign demand and concerns over a loss of competitiveness to China. Further concern arose earlier this week when Volkswagen AG announced it is considering unprecedented plant closures in Germany, a first in its 87-year history.
On the political front, France’s political landscape took a clearer shape as President Macron appointed Michel Barnier, the former Brexit negotiator, and a senior conservative figure, as the new prime minister. This move allows the government to focus on fixing the nation’s finances. The Finance Bill for 2025 is due to be submitted to the parliament by 1st October at the latest. Following the announcement, the OAT-Bund 10-year spread narrowed by 3bps to 70.6bps from the session high, and the CAC 40 briefly rallied 0.5%. However, the French stock index ultimately closed lower, in line with the broader global stock market trend.
US data to decide the pound’s fate
Boris Kovacevic – Global Macro Strategist
The British pound pushed through the risk aversion seen last week and has once again reclaimed the high $1.31 level. This week’s rebound has mainly been a function of the macro induced dollar weakness as sterling didn’t make any gains versus the euro, yen, or Swiss franc. Domestic data has been spares and investors focused primarily on the global news flow and US data.
Today’s nonfarm payrolls report is all that matters for the pound going into next week, which will see the release of UK labor market data and a plethora of other economic variables such as manufacturing production and GDP. The US job report and the upcoming UK data will settle the debate if the Bank of England will cut interest rates in two weeks on the 19th.
Implied volatility remains elevated going into non-farm payrolls today. GBP/USD could theoretically breach the $1.31 or $1.32 marks given a large enough deviation of job growth from consensus. Investors are still betting on a medium-term appreciation of the pound as speculators remain net-long on the currency and delta risk reversal indicators favor call vs. put options on the 3-month tenor.
CHF, JPY rising ahead of US job report
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 2-6
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
