Market movers today
- It is the day of the jobs report in the U.S. We expect non-farm payrolls to have grown by 100,000 in September, which is below the Bloomberg consensus of 140,000. While the non-farm figure tends to be volatile, the employment indices in the Markit PMI and the ISM reports do not look encouraging (and actually signal that jobs growth was even lower than our expectation of 100,000). A weak jobs report will likely add fuel to the repricing of the Fed seen this week.
- Today also provides the opportunity to listen to Fed comments from Rosengren, Botstic and Powell, who are scheduled to speak. Powell is only making opening remarks at a "Fed Listen" event though, so we would not get our hopes up too high that he will give out new monetary-policy signals.
- No major events scheduled in the Scandies today.
Selected market news
In another sign that the global economic slowdown is making its mark on the US economy, yesterday it became blindingly obvious that the service sector cannot go unabated amid a widespread manufacturing slump. European PMIs came out on the soft side throughout the day, but it was notably a very weak US non-manufacturing ISM that made markets react more profoundly. The headline dropped to 52.6 (from 56.4 last), a 3Y low, as not least, new orders and the employment sub-index witnessed big declines. Taken together, this week's ISM reports now signals US growth of a mere 1% q/q (ar). This adds further support to our call for another Fed cut later this month, even if the Fed's Clarida yesterday reiterated that it is one meeting at a time and that the US economy is in a 'good place'.
Equities went higher on Thursday, with the S&P up 0.8% on the day after the ISM release as expectations of a Fed cut in October were raised further to now stand above 85%, compared with some 40% at the start of the week. Thus, even if we are right in our below-consensus call on non-farm payrolls today, it is probably limited how much more can be priced near term, and attention will centre on whether Fed members are willing to commit to a series of cuts (mind the members speaking today). EUR/USD failed to break the 1.10 mark this time around but should be ripe if today's jobs report is weak. USD/JPY fell below 107 as US 10Y yields went under 1.54% - note that there is now some 10bp to go before reaching the year-lows of early September. Short-end Treasury yields dropped around 9bp and the curve bull-steepened. Meanwhile, at this stage, the market seems little affected by the rolling impeachment process against the US president.
After the US jobs figures today, markets will be centring attention on next week's high-level US-China trade negotiations, where we see 60% chance of an interim deal. After the US got the WTO's blessings to impose tariffs on, among other things, aircraft from Europe, the European Commission trade spokesman, Rosario, said yesterday that the EU will not immediately retaliate and is still looking to negotiate a solution. By mid-November, the US is also due to decide whether to impose tariffs on European auto imports.
Fixed income markets
Despite the ECB’s recent easing package, market-based inflation expectations, measured by the EUR 5y5y inflation swap, hit a new record low of 1.11% yesterday. We do not expect new near-term stimulus measures from the ECB at the current juncture, or at least until the ECB acknowledges de-anchoring of inflation expectations. That said, the declining and worrying inflationary pressures increase the risk of ECB action. The recent communication from the ECB has clearly been that fiscal measures are the main policy tool. Given the weakening of the global business cycle, we see further downside for 5y5y and expect a test of 1% here in October.
Euro area curves bull-flattened yesterday as the service PMIs surprised to the downside both in the US and the Euro area. 10Y BTP outperformed as investors have now digested the new 10Y linker and as the hunt for positive yield is back, with both 10Y Spain and 10Y Portugal just 12bp away from trading at negative yields.
Portugal holds its general election on Sunday. The Socialist government with PM Costa is widely expected to be re-elected with an even stronger political base. Hence, Costa’s fiscal consolidation agenda is likely to continue. If we get a strong backing for Costa, we should expect more PGB performance next week. The positive rating cycle of Portugal is also set to continue. Portugal is on ‘positive outlook’ from all three major rating agencies.
FX markets
As expected, EUR/USD briefly touched 1.10 after the US ISM non-manufacturing number came in way below expectations. USD/JPY has also got some support in the past few days, where yields are coming down as negative data surprises increase the expected dovishness from the Fed. That said, our short-term forecast of USD/JPY at 106 once again appears to be well within range. A similar situation played out in PMI services for the UK and Sweden and the pressure is increasing for the Bank of England, and not least the Riksbank, to add further policy support. Today, the key focus turns to the US payrolls: if we are right that job creation could come in on the weak side, expect some upside pressure on EUR/USD.
Yesterday, the PLN strengthened after the EU court of justice came out with less harsh CHF loan ruling against Polish banks than expected. While the ruling will allow easier FX terms for some of the franc borrowers, these borrowers will face higher Polish interest rates on the loans, making it less favourable for borrowers to try and change the terms via the courts and reducing the cost for Polish banks. The PLN may get a further tailwind next week if the US and China strike an interim trade deal (we see 60% chance of such an outcome), but we still think the weak global macro background will work against the Zloty toward the end of the year, followed by a strengthening early next year as the world economy is likely to strengthen.
Key figures and events
