Written by Convera’s Market Insights team
Jobs report to leave Fed on fence?
A broad selloff in world government bonds has stabilised for now, with the 30-year US Treasury yield at 4.9%, after spiking above 5% for the first time since 2007. US Treasury yields and the US dollar have been very reactive to economic data releases coming from the US recently and therefore there’s potential for elevated volatility today as markets brace for the all-important US jobs report.
The sell-off at the long end of the yield curve can be seen as a supply vs. demand issue. Important factors explaining the move higher in yields can be found on the supply side, but on the demand side, stronger economic growth has supported the thesis of a higher for longer rates regime. Today, the closely watched jobs report comes on the heels of a run of mostly resilient US economic data such as job openings and ISM PMIs this week and yesterday’s initial jobless claims close to a 7-month low. The data added to evidence that the US labour market remains at historically tight levels, adding leeway for rates to remain high for longer. Although we expect the US employment report today to show a slight deceleration in job growth last month, it probably won’t be enough to take the risk of another Fed hike completely off the table. That said, we do expect the labour market to weaken further later in the year as the economy slows in response to higher interest rates, tighter lending standards, and a pullback in consumer spending.
In the short-term, everything depends on the non-farm payrolls report. Looking beyond this or the next week, however, US congress would have to establish the perception of fiscal responsibility again to avoid a continued rise in yields. We see lower yields ahead next year based on the deterioration of US private activity due to the lagged effect of higher interest rates. This supports our call that the US dollar might soon find a peak and embark on a weaker path through 2024.
George Vessey – Lead FX Strategist
CA jobs figures key for BoC rate expectations
The US dollar retreated from Thursday’s high of 1.3785 versus the Canadian dollar and is currently trading at the lower end of 1.37 as the surge in US Treasury yields has eased. With Canadian jobs data released simultaneously with US Non-farm Payrolls (NFPs) report, today’s USD/CAD reaction will depend on the two data points.
The NFP figure is expected to come in at 170k for September, down from 187k in August – a slight deceleration in job growth. For Canada, market participants are expecting a relatively strong 20k m/m increase for September, down from 39.9k m/m seen in August, and a slight uptick in the unemployment rate to 5.6%, up from 5.5%. However, labour market data volatility has been an issue in Canada. June and August saw very strong (60k and 40k respectively) growth mixed in with very weak readings for May and July (-17k and -6k). This means that the probability of a below consensus, or even a negative, print is skewed to the downside.
Why does this matter? Jobs reports matching or exceeding consensus would support the calls for further monetary tightening by Bank of Canada (BoC). Since the last meeting in July, BoC has kept its policy rate at 5.0%, while the Fed hiked to 5.25%-5.0% in July. Being one of the first hawks, BoC’s rate is now below the Fed’s which is hurting CAD via a negative rate differential. Markets are currently pricing in a 42% probability of a rate hike by the end of the year.
Ruta Prieskienyte – FX Strategist
Neutral euro at $1.05 before big data
Investors have calmed down a bit after US 10-year government bond yields reached a 16-year high on Wednesday in a move that shook global financial markets. Since then, both the euro and equity markets across the US and Europe have started a minor recovery attempt. However, light, and somewhat neutral positioning before the anticipated release of the US jobs report later today has meant that the upwards movement of risk assets has been limited.
Markets are expecting the European Central Bank to be done raising rates and are placing a less than 20% probability of another tightening this year. Against the backdrop of weak economic data, speeches from Governing Council members have been mostly ignored. Today, a report on German factory orders showed a slight rebound in August, with demand for German goods increasing by 3.9% on the month in August. The German 10-year yield has come down from its highest level since 2011 above 3% from Wednesday and is now trading at around 2.89%.
The fall in yields and the slight increase of the euro by 0.8% has been supported by oil prices heading for their biggest weekly drop since March, being down around 9%. The decline in gasoline demand in particular is a sign of how demand is being destroyed at these high price and yield levels. Both real rate differentials and our fair value model for EUR/USD suggest, that a $1.05 level remains appropriate for the euro to trade around. It is more likely that the Fed and US data will influence the yield differential more than the ECB in the months ahead, with Europe remaining in the shadows.
Boris Kovacevic – Global Macro Strategist
CAD hurt by 10% drop in oil
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 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.Written by Convera’s Market Insights team
