The monthly US employment report is the key to the remainder of the session. Market participants appear to generally accept several things about the report.
First that the August time series, as well as the September series is often subject to upward revisions from the first estimate.
Second, that barring significant surprise, those that expect the Fed to hike are largely concentrated in the December time-frame not October.
Third, that the unemployment rate of 5.1% is nearly identical to the level that prevailed when the Fed's last tightening cycle began. The broader measure that includes those who take part-time work because they cannot find full time work was nearer 9.5% than August's 10.3%.
Fourth, compelling evidence of reduced slack in the labor market comes from higher earnings. The market expects a 0.2% rise in average hourly earnings in September. This would match the average monthly increase in recent months, and lift the year-over-year rate to 2.4%, which would be the highest since August 2009.
On balance, a report broadly in line with expectations may see a headline reaction, the most likely scenario is for participants to fade the initial move. It is unlikely to change views about the Fed's lift off. Many are still wrestling with the weak manufacturing ISM (lowest since May 2013) and the downward revisions to Q3 GDP estimates spurred by flash merchandise trade report in the middle of the week. The Atlanta Fed's GDP nowcasting slashed its Q3 tracking to 0.9% from 1.8%. Many private sector economists cut their estimates toward 2.0% from around 2.5%.
Separately, data from Japan and Australia earlier today pushes participants in the direction they were already moving, and that is to reduce the perceived chances that either central bank eases policy at next week's meetings. The unexpected decline in Japan's industrial output in August fanned speculation that the world's third largest economy contracted for the second consecutive quarter in Q3. However, today's report showed overall household spending rose 2.9% year-over-year in August. The consensus was for a 0.3% increase after falling 0.2% in July.
Japan also reported unemployment rose to 3.4% from 3.3%, while the job-to-applicant ratio rose to 1.23 from 1.21. This is the highest since 1992. It shows a tight labor market, despite the increase in the unemployment rate. The BOJ meets on October 6-7. Some expect a policy announcement, but the majority do not.
The dollar continues to coil in the symmetrical triangle pattern that began in late-August. The top of its comes in near JPY120.50 today. A close above it would lift the tone. Last Friday, it poked through the upper end, failed to confirm it on a closing basis.
The Reserve Bank of Australia meets next week as well. Although the easing cycle may not be over, there is little urgency to move immediately. In fact, the recent string of data has been encouraging. Earlier today, Australia reported a 2.3% increase in new home sales and a 0.4% rise in retail sales. In July new home sales fell 1.8% and retail sales were off 0.1%. These reports follow improvement reported this week in house prices, credit and the manufacturing PMI.
The Aussie hit a low just below $0.6940 earlier in the week. It has been moving broadly sideways, rising to $0.7085 yesterday, but fell back to $0.7010 earlier today. The fading of the downside momentum is not the same as building upside momentum. A close today above $0.7060 would lift the tone.
Sterling's nine-day losing streak ended yesterday, but here too the upside momentum has not been seen. A close above $1.5200-$1.5215 today would be encouraging. Ahead of the US jobs data, the market did not make much headway despite the better than expected construction PMI. It rose to 59.9 in September from 57.3 in August. The consensus was for a 57.5 reading. The euro has found support in the GBP0.7360 area and this may be limited sterling's upside against the dollar.
The euro put in the low for the week (thus far) yesterday near $1.1135. Waiting for the US jobs data, the market has been content to leave it within yesterday's ranges. It is difficult to get enthusiastic about the single currency. The week's high was set near $1.1285. A knee-jerk reaction toward $1.1250 may be sold into today. Last week's low was just below this week's, and then there is the $1.1085 area that is important technically.
The week has featured numerous Fed officials speaking, and today is not exception. Three Fed officials speak. Harker from Philadelphia speaks. Because he is new, his views are awaited and will draw attention. Bullard's views are well known. He favors a rate hike this year. Vice Chairman Fischer also speaks. His views reflect the Fed's leadership. They will be looked upon for confirmation of the leadership's desire to hike rates, slowly and gradually, but beginning this year.
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