by Pinchas Cohen
The Week That Was
US
Since the end of August, when Hurricane Harvey made landfall along the US's Gulf Coast, we have been warning that it and subsequent storm Irma—which notably pounded Puerto Rico and Florida—were going to create unreliable readings, both higher and lower, across a broad spectrum of US economic data for months to come. Sure enough, beginning with this past Friday's Nonfarm Payrolls release for September, the fallout is becoming more visible.
The NFP result was a loss of 33,000 jobs versus the expected 90,000 increase, the first decline in hiring since 2010. However, a deeper drilldown beyond the headline number reveals that unemployment actually fell to 4.2 percent and, more importantly, there was a 2.9-percent YoY spike in hourly wages, the highest level of wage growth in more than eight years.
Rising wages may suggest inflation is at long last making an appearance, especially after last week's fastest US ISM manufacturing growth reading in 13 years, two months before the end of a long year in which traders have been waiting for any sure sign of economic expansion. After the release, the Dollar Index was bid up by 0.3 percent and 10-year Treasury yields moved higher by 1.6 percent.
On Friday, investors chose to focus on the glass being half full via the average hourly earnings component of the NFP, which showed the fastest wage rise in more than eight years rather than the glass being perhaps half empty as a result of the first decline in hiring in 7 years. Of course it's really inflation that's key, and the reason we pay attention to job growth is to also estimate wage expansion; since that appears to have been accomplished, the probability of inflation increases.
However, while the decline in job growth is attributed to the devastating hurricanes, it's possible wage growth might also have occurred as part of the tailwind. As we’ve been warning, the next few months will prove a challenge to economists in general and policy makers in particular. Economic data will be suspect.
While dollar and Treasury investors have been pessimistic about future interest rate increases on the lack of rising inflation throughout the year, even as equity traders pushed stock indices higher on roaring optimism from any news that could be considered supportive of the inflation/interest rate hike story, it was, ironically, dollar and Treasury investors who chose to disregard Friday's bad news regarding job growth this time, focusing instead on the wage growth component. Adding to the role-reversal: on Friday it was equity investors who chose to focus on the disappointing jobs number and hence sold off.
Still, dollar investors couldn’t even enjoy the brief respite; the latest missile test threat from North Korea caused traders to shortstop their growth asset trading and rush into safer havens.
So where to from here? Hard to say, but even after the latest North Korean sabre rattling and the S&P 500 closing lower on Friday, the index still finished the week ahead, it's fourth straight week to do so, and a mere 0.10 percent away from its all-time high.
However, we expect volatility. Each report, tweet and rumor regarding the next Fed Chair appointment is almost certainly going to produce strong, even if short-term, market reactions.
Europe
In an additional ironic twist—the first being the reversal of sentiment between equity traders and dollar and Treasury investors described above—while the US had a good week overall, Europe, the leader in global growth, had a negative week from the economic data perspective, in addition to still being mired in political uncertainty from a variety of fronts.
About 90 percent of those voting in the unofficial Catalonia freedom referendum opted for Catalan independence. The region accounts for about 20 percent of the Spanish economy, and is the location of several bank headquarters. While the vote holds no legal mandate in Spain, it imbues the euro – along with Spanish equities and bonds – with uncertainty. In a post-Brexit referendum-like effect, the political turmoil has already prompted two major banks based in Catalonia – Sabadell (MC:SABE) and Caixabank (MC:CABK) – to consider relocation.
Eurozone economic data was weaker in the past week, with disappointing unemployment as well as retail spending releases. These are considered as temporary volatility. Consumer confidence is at a 16-year high.
The Week Ahead
All times are EDT
Sunday
21:45: China – Caixin Services PMI (September): forecast to increase to 53.1 from 52.7.
Monday
- US: Columbus Day Holiday
- Canada: Thanksgiving Day Holiday
2:00: Germany – Industrial Production (August): expected to rise to 0.7 percent MoM from 0.0 percent, confirming Germany as the eurozone leader of the global growth story.
After, recording a new all-time high last Wednesday, German’s DAX Index has been struggling to meaningfully overcome its mid-June peak with another rally. The 13,000 level has been proven as a powerful, psychologically key-level. A close beneath 12,900 may suggest a return toward the 12,000 levels, whereas a close above 13,000 would suggest another rally.
19:01: UK – BRC Retail Sales Monitor (September): previous read was 1.3 percent.
Will UK retail sales confirm accountancy firm BDO's Friday numbers, showing sales were boosted by an annual 2.9 percent, jumping to the highest level in over three years?
This, after last week’s Confederation of British Industry (CBI) showed that retail sales growth hit a two-year high in early September, beating expectations. These results followed strong August numbers from the Office for National Statistics, showing a 1 percent growth.
The British pound has been falling, over 4 percent since mid-September, reaching its uptrend line since October, as well as the 1.3000 key level. Another bullish retail read, a key economic report for developed economies, would coincide nicely with the technicals.
Tuesday
2:00: Germany – Trade Balance (August): previous reading was a surplus of €19.5 billion.
9:30: UK – Trade Balance (August): July figure was a deficit of £2.9 billion.
20:30: Australia – Westpac Consumer Confidence (October): index expected to fall to 97.5 from 97.9
Wednesday
14:00: US – FOMC Minutes: these will help reinforce the hawkish outlook delivered by Fed Chair Janet Yellen at the recent meeting and in subsequent speeches.
After Yellen turned the wheel of monetary policy to the interest-rate fast lane, this will be another opportunity to press down harder on the accelerator.
Technically, while the US Dollar Index crossed above its falling channel since April, it has failed to register a peak higher than its former August 16, 94.14, high, while forming a bearish Shooting Star, in a sign that the bears have regained control after North Korea’s most recent threats. This would be in line with a return move to retest the broken downtrend line, expected to now provide support. A good entry would be at the 93.00 area when it shows up, both a psychological round number as well as where the short-term uptrend line since early September.
Thursday
8:30: US – Initial Jobless Claims (w/e 7 October): expected to rise to 236K.
10:15: Eurozone – ECB President Mario Draghi Speaks
Europe’s current political turmoil, starting with German Chancellor Angela Merkel’s coalition challenges, and continuing with Spain’s Catalonia uncertainty has placed a lot of pressure on the euro, the best preforming major currency of the year until recently.
Last month, ECB boss Draghi suggested that the European Central Bank may begin its tapering process as early as October. Would Draghi drive that home now in effort to support the ailing single currency, or would he secretly smile at its demise, after voicing his concern that it's over-priced which could have negative consequences on European exports and hence its economy?
Technically, the EURUSD pair found support at the August trough. A rise over the September 1.2100 peak would signal a resumption of its rally, while a break below 1.1650 signal a reversal. At this point, the price action suspiciously looks like an H&S top is forming.
10:30: US – EIA Crude Oil Inventories (w/e 6 October): previous week saw a fall of 6 million barrels.
Nate, the latest storm system to make its way to the US has made its second landfall near Biloxi, Mississippi after earlier hitting southeast Louisiana. In anticipation, offshore oil drilling rigs were closed which could cause a hit to production of an estimated quarter-million barrels of oil a day. With global supply already showing signs of rebalancing from OPEC measures, we might expect the price of oil to rise.
Technically, after falling below the supportive uptrend line since August 31, the price may dip further down to find the support of the longer uptrend line since June 21, at $48.
Friday
1:00: China – Trade Balance (September): surplus expected to increase to $48 billion from $42 billion.
Ironically, while a trade surplus for China might be at the expense of its biggest trading partner the US, it also means the Asian nation's economy is chugging along, keeping it in position as the leader of global economic growth since the Great Recession. While this may impair US economic growth, it could provide a boost to its equity markets.
An interesting study is to pit global growth leaders currencies against each other: the euro versus the Chinese yuan. Technically, the euro may be developing a descending channel, which demonstrates that selling is growing more enthusiastic, as sellers are willing to sell at ever lower prices, while demand remains steady. A decisive close beneath the 7.750 level would suggest a reversal with a minimum target of 7.6000.
8:30: US – CPI, Retail Sales (September): overall CPI expected to rise to 2% from 1.9% YoY, and fall to 0.1% from 0.4% MoM. Core CPI expected to rise to 1.8% from 1.7% YoY. Retail sales expected to rise 0.3% MoM from -0.2%.
10:00: US – Michigan Consumer Confidence (October, preliminary): index expected to remain flat at 95.1.