Friday’s relief rally in full swing

Friday October 12: Five things the markets are talking about

Volatility, in particular, for equities, has notched aggressively higher this week, now that sovereign bond yields are beginning to price out cheap money.

Stronger than expected U.S economic data and weak European underlying inflation in key countries is being blamed as the specific trigger for this week’s ‘bearish’ bout.

However, Chinese trade data released earlier this morning showed better-than-expected growth in Chinese exports has, at least temporarily, helped ease investor concerns about the damage to China’s economy from U.S tariffs and other trade friction.

China’s trade surplus with the U.S widened to a record +$34.1B in September as exports to the American market rose by +13% y/y, despite a worsening tariff war.

Global equities have staged a robust recovery; the ‘big’ dollar trades steady, U.S Treasury yields back up and crude oil prices recover while still heading for the biggest weekly drop in three-months.

Nevertheless, a gradual Fed rate increase remains the order of the day, especially after yesterday’s muted U.S CPI data – the market is pricing in a +25 bps move in December.

Since the Fed’s last meeting in September all data has been in line with the Fed’s depiction of an economy in which low unemployment will be coupled with inflation running near +2% for the foreseeable future.

1. Stocks sell off ends in Asia

Chinese stocks, among the biggest losers in a global market selloff this week, rallied overnight, as investors reassessed the impact of the Sino-U.S trade spat on the country’s economy and its markets.

In Japan, the Nikkei ended higher on Friday as investors took heart from gains in Chinese equities on upbeat export data, which generated buying in manufacturers exposed to China. The Nikkei share average gained +0.5%. On Thursday, the index slid -3.9% and for the week the index was down -4.6%, its biggest weekly drop since March. The broader Topix traded flat.

Down-under, Australia’s ASX 200 lagged most of Asia Pacific overnight as the heavily weighted energy and financial sector held the index back. It ended +0.2% higher, but fell -4.7% for the week. In S. Korea, its stock market rebounded from one of its biggest drops in seven-years. The Kospi rallied +1.5%, its first gain this month. The index fell -4.7% for the week.

In China, the main stock indexes bounced higher overnight after suffering massive losses this week, as investors went bargain hunting on the back of stronger Chinese exports data. At the close, the Shanghai Composite index was +0.9% higher, after touching near four-year lows yesterday. The index was down -7.6% for the week, its worst weekly performance in eight months. The blue-chip CSI300 index closed +1.49% higher.

In Europe, regional indices trade higher across the board rebounding from multi-month lows following a rebound in U.S index futures and Asian Indices.

U.S stocks are set to open deep in the ‘black’ (+0.8%).

2. Oil rebounds, but pares gains on adequate supply, gold lower

Oil has rallied overnight; rebounding after two-days of heavy declines, though prices pared gains after an IEA report deemed supply adequate and the outlook for demand weakening.

Brent crude has rallied +76c to +$81.02 a barrel, having dropped by -3.4% yesterday. U.S crude (WTI) has added +71c to +$71.68.

Note: Brent is still on course for a -3.7% decline this week, the biggest weekly fall in about four-months.

Oil found support from data showing that China’s daily crude imports last month hit their highest in four-months and from a rebound in equities.

Gains were pared, after a monthly report by the IEA said the oil market looked “adequately supplied for now” after a big rise in production and trimmed its forecasts for world oil demand growth this year and next. “This is due to a weaker economic outlook, trade concerns, higher oil prices and a revision to Chinese data,” said the IEA.

Ahead of the open, gold prices are under pressure as global equities rally, but the ‘yellow’ metal trades within striking distance of its 10-week high print in yesterday’s session. Spot gold is down -0.4% at +$1,218.86 an ounce, after rallying +2.5%yesterday, as this weeks equity rout sent investors rushing to safe-havens. U.S gold futures are down -0.4% at +$1,222.30 an ounce.

3. Yields back up on relief

Eurozone government bond markets show signs of relief as equity markets rebound. The 10-year Bund yield is trading +2.3 bps higher at +0.54%, pulling the yields of other core and semi-core issuers higher.

Note: Bunds yields are down from five-month highs reached earlier this week at +0.58%.

Eurozone periphery government bond yields trade lower, indicating a lower level of concern, at least for the day. Italy’s 10-year BTP yield is trading -4.5 bps lower at +3.53%.

Note: Italian 10-year bond yields rose to five-year highs earlier this week on tension between Rome and the E.U over Italy’s expansionary budget plans.

Elsewhere, the yield on 10-year Treasuries has backed up +3 bps to +3.18%, the biggest advance in a week. In the U.K, the 10-year Gilt yield has gained +2 bps to +1.694%. In Japan’s 10-year JGB yield has climbed less than +1 bps to +0.15%.

4. Dollar stable, EM pairs rally

USD initially tested multi-week lows as a weak Wall Street soured its recent bullish sentiment. Nevertheless, the greenback is off its worst levels as the equity sell-off has eased.

After jumping to an 11-day high of €1.1611 overnight, the dollar has stabilized and EUR/USD trades slightly higher, last by +0.1% at €1.1593. However, expect Italian fiscal risks and the direction of U.S yields to continue to drive the EUR/USD.

Emerging-market currencies are having another good day after weathering the global equity selloff this week. The South African rand is up +1.1% at $14.483, and the Mexican peso has gained +1.5% at $18.8718. The Turkish lira has paired some of its gains, but its trading +2% at $5.9451 – up +5% on the week.

The PBoC set yuan at weakest level since March 2017, a day after U.S Treasury staff advised Secretary Steven Mnuchin that China was not manipulating its the exchange rate. The midpoint for the dollar was ¥6.9120.

GBP/USD (£1.3215) is trading within striking distance of its three-week highs on hope for a Brexit agreement at the upcoming E.U leader summit next week. There is speculation that PM May is close to an agreement, but obstacles remain, as she requires the DUP Party ally and rebel Tory members support.

5. Eurozone factory output rebounds

Data this morning showed that industrial production in the eurozone rebounded strongly in August, as surges in Italy and the Netherlands offset weakness in Germany to suggest economic growth across the currency bloc continues at a modest pace.

The E.U’s statistics agency said industrial production was +1% higher in August than in July, and up +0.9% on year. The market was looking for a monthly gain of just +0.2%.

It was the first rise in production since May, following two straight months of decline.

Today’s healthy rebound will likely reassure the ECB that the economy is on course to grow more slowly this year than last, but still at a rate that will lead to new jobs being created, thereby pushing wages and inflation higher.

Note: The IMF trimmed its eurozone growth forecast for this year to +2% from +2.2%, noticeably downgrading its growth projection for Germany to +1.9% from +2.2%.

Forex heatmap

Canada: Building permits, August 2018

Canadian municipalities issued $8.1 billion worth of building permits in August, up 0.4% from July. Strength in the non-residential sector drove the increase, while the residential sector declined for the third consecutive month.

Non-residential sector: High value projects drive the increase

In the non-residential sector, $3.2 billion worth of permits were issued in August, up 8.8% from the previous month. Both the institutional (+25.8%) and commercial (+8.9%) components contributed to the gain, which was largely the result of the issuance of permits for a new hospital in Ontario and new office buildings in British Columbia.

Meanwhile, the value of industrial permits fell 5.9% in August to $677 million. This followed a 13.4% gain in July, as multiple permits were issued that month for transportation terminals and manufacturing structures in Ontario and Alberta.

Residential sector: Third consecutive month of declines for both components

Municipalities issued $5.0 billion worth of residential permits in August, down 4.4% from July and marking the third consecutive monthly decline for the sector. Five of the six provinces that posted decreases had lower intentions for both single and multi-family construction.

The value of permits for single-family dwellings was down 5.2% to $2.2 billion, maintaining the general downward trend that began in January 2018. While eight provinces posted decreases in the month, Ontario and British Columbia contributed the most to the decline.

In the multi-family dwelling component, the value of permits fell 3.8% to $2.7 billion. Despite the monthly decline, the year-to-date value was $3.5 billion higher than the same time last year. Multi-family dwellings have represented over 70% of the total units for six of eight months so far this year. There are no previous years on record where multi-units exceeded that level.

Provinces and census metropolitan areas: British Columbia reaches another record high

In August, only three provinces reported gains, led by a record high in British Columbia. The largest decline occurred in Ontario, due to lower construction intentions in the residential sector.

The value of permits in British Columbia reached a record high of $1.8 billion in August, 12.8% above the previous record set in March 2018. In the non-residential sector, the value of permits passed the $600-million mark for the first time. Large projects for office buildings in the Vancouver census metropolitan area (CMA) were largely responsible for the growth.

In the CMA of Vancouver, the value of permits rose 66.4% to $1.4 billion in August, accounting for three-quarters of the value in British Columbia. Although most of the increase came from the City of Vancouver, the City of Burnaby issued over $250 million worth of permits for apartment buildings, bringing the total to over $800 million for the year.

In Ontario, all components declined in August, except institutional buildings. The value of permits in the residential sector dropped 13.9%. This followed several strong months in the multi-family dwelling component.

At the CMA level, the value of residential permits in Ottawa fell 60.9% in August, following a 59.9% gain in July. This was due to the implementation of higher development fees in the city, as developers applied for permits ahead of August’s fee increase.

StatsCanada

U.S producer prices increase for first time in three months

U.S. producer prices rose for the first time in three months amid a surge in gauges reflecting airfares and rail-transportation costs, a Labor Department report showed Wednesday in Washington.

HIGHLIGHTS OF PRODUCER PRICES (SEPTEMBER)

  • Producer-price index rose 0.2% m/m (matching est.) after a 0.1% drop in prior month; up 2.6% y/y (est. 2.7%) after 2.8% gain
  • Excluding food and energy, core gauge rose 0.2% m/m (matching est.); up 2.5% y/y (matching est.) after 2.3%
  • PPI excluding food, energy and trade services, a measure some economists prefer because it strips out the most volatile components, rose 0.4% m/m, most since Jan.; up 2.9% y/y, same as Aug.
  • Key Takeaways

    The monthly increase in the broad index stemmed partly from a 1.8 percent rise in transportation and warehousing services, a record in data back to 2009. That reflected a 5.5 percent jump in the category of airline passenger services, also a high in figures dating to 2009, while rail transportation of freight and mail was up 1.4 percent, the most since 2012.

    Overall, services prices increased 0.3 percent while the cost of goods fell 0.1 percent, reflecting declines in both food and energy. The decrease in goods prices was the first since May 2017.

    While the figures — which highlight wholesale and other selling prices at businesses — are less prominent in investors’ minds than the consumer price index out Thursday, they illustrate how changes in input costs are feeding into inflation. PPI reports have limited usefulness in predicting the monthly CPI reports, JPMorgan Chase & Co. economists said in a recent note.

    Amid trade tariffs and retaliatory levies, inflation pressures are being closely watched, particularly for signs of how likely they filter through production pipelines and on to businesses and consumers. Benchmark Treasury yields have climbed to multi- year highs this month amid investor expectations that the Federal Reserve will continue raising interest rates to the point of eventually restricting growth.

    Other Details

  • Energy prices fell 0.8 percent from the prior month, biggest drop since March; food costs dropped 0.6 percent, same decline as prior month
  • One-third of advance in final demand services stemmed from airline passenger services, which mostly reflects airfares
  • BLOOMBERG

    Dollar gains pause, but probably not for long

    Wednesday October 10: Five things the markets are talking about

    U.S treasury yields are largely stable, after declining from their seven-year high print yesterday.

    Euro equities are on the back foot after Asia stocks managed to break a multi losing session.

    Elsewhere, the ‘big’ dollar has stalled temporarily after U.S President Trump said the Fed should not raise interest rates as fast. However, Trump’s plea is unlikely to alter the broader theme of dollar gains in the short-term.

    Dollar ‘bulls’ have yet to have a clear understanding of what the top is for the Fed cycle, and until the Trump administration changes its tune on China and trade, investors will continue to support the USD against emerging markets and pro-growth currencies.

    For the dollar ‘bear’s’ next month’s midterm elections have the potential to derail dollar demand, especially where the loss of the House by the GoP would curtail most hopes for fresh fiscal stimulus. However, a month is a long time in politics.

    Despite the U.S bond rout easing a tad, +$230B of new U.S debt is coming to the market this week, which should put pressure on dealers to back up yields.

    U.S producer and consumer price data is also due in the next two-days and it too will determine where yields go from here.

    1. Stocks mixed results

    In Japan, the Nikkei edged a tad higher overnight as investors picked up defensive stocks on the dips, while index-heavyweight SoftBank dived on news it was to buy a majority stake in U.S shared office space provider WeWork. The Nikkei share average ended +0.2% higher, while the broader Topix was also up +0.2%.

    Down-under, Aussie stocks rallied after its worst 48-hours in six-months. The ASX 200 closed +0.1% higher as the health-care sector rebounded +1.5%, reversing some of yesterday’s -3.9% losses, the biggest drop in seven-years. In S. Korea, the Kospi stock index closed down -1.12% overnight, hitting its lowest close in 18-months after the IMF cut its growth forecast for the country.

    In China, stocks were mixed after the close overnight, as gains in utilities and communications led shares higher while losses in the energy sector led shares lower. At the close, the Shanghai composite rallied +0.18%.

    In Hong Kong, stocks closed marginally higher earlier this morning, with investors remaining nervous about volatility in the U.S and a weak yuan. The Hang Seng Index edged up +0.08%.

    In Europe, regional bourses continue their bearish tone with declines across the board. Sino-U.S trade concerns, coupled with Italian budget and U.K Brexit commentary continue to weigh on markets.

    U.S stocks are set to open in the ‘red’ (-0.1%).

    Indices: Stoxx600 -0.4% at 371.5, FTSE -0.1% at 7227, DAX -0.6% at 11904, CAC-40 -0.7% at 5283, IBEX-35 -0.6% at 9203, FTSE MIB -0.2% at 20023, SMI 0% at 8960, S&P 500 Futures -0.1%

    2. Oil dips as IMF cuts growth outlook; eyes on hurricane

    Oil prices have eased a tad after the IMF yesterday lowered its global growth forecasts. Nevertheless, markets are well supported on pullbacks as Hurricane Michael, a category 4, moves toward Florida causing the shutdown of nearly +40% of U.S Gulf of Mexico crude production.

    Brent crude is down -20c at +$84.80 a barrel, after a +1.3% gain on yesterday. U.S light crude is down -15c at +$74.81.

    Also providing an underlying bid is data showing crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions next month.

    According to tanker data, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4. Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

    Yesterday, the IMF cut its global economic growth forecasts for 2018 and 2019, raising concerns that demand for oil may also slump.

    Ahead of the U.S open, gold is holding steady in a narrow range overnight, as the ‘big’ dollar pulls back from its seven-week high – support remains strong for the dollar on the back of a strong U.S. economy and expectations of steady interest rate hikes by the Fed. Spot gold is little changed at +$1,189.35 an ounce, moving largely within a +$4 range. U.S. gold futures have rallied +0.1% to +$1,192.60 an ounce.

    3. Sovereign yields dip, including Italy’s BTP’s

    Italian BTP yields have eased a tad this morning after Italy’s Economy Minister Giovanni Tria confirmed budget forecasts and said that he expected collaboration with the E.U over the budget.

    After hitting multi-year highs yesterday, Italian government bond yields fell -2 bps along the curve – the two-year BTP yield fell to +1.70%. The spread of Italy’s 10-year BTP’s over Germany’s has widened +10 bps to +3.026%.

    Yesterday, President Trump repeated his displeasure with higher short-term interest rates set by the Fed. Trump believes U.S inflation remains “in check,” which does not warrant a tighter monetary policy, especially at the Fed’s current pace.

    The yield on U.S 10’s has eased -1 bps to +3.21%. In Germany, the 10-year Bund yield has decreased -1 bps to +0.54%, while in the U.K, the 10-year Gilt yield has backed up less than +1 bps to +1.719%.

    4. Dollar takes a breather

    The pound (£1.3160 +0.10%) has advanced to a four-month high against the EUR and a two-week high against the dollar, on signs of momentum in the Brexit negotiations. According to the Times, a group of between 30 and 40 Labour members of parliament will defy Jeremy Corbyn and endorse a less hard-line proposal to prevent a ‘no-deal’ exit from the E.U.

    Note: Both the U.K and E.U are said to have made progress in Brexit negotiations over Irish backstop.

    Rising Italian bond yields continue to provide some resistance for the EUR (€1.1482), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place.

    The USD/JPY (¥113.19) is a tad higher as the yen snapped a four-day winning streak as some safe-haven flows retreated as U.S Treasury rates stabilized.

    5. U.K economy picked up in the summer

    Data this morning showed that U.K economic growth picked up over the summer, supported by stronger retail sales and house building in response to warmer-than-usual weather.

    According to the ONS, economic output in the three-months through August was +0.7% higher than in the three-months through May, equivalent to annualized growth of +2.8%.

    However, there were signs that the U.K economy was losing traction towards the end of the period, with output flat in August compared with July.

    According to the ONS, “the economy continued to rebound strongly after a weak spring with retail, food and drink production and house building all performing particularly well during the hot summer months.”

    Note: The BoE indicated it would follow its two rate rises with a number of further moves over the coming years if the economy continues grow at around its current rate. However, expect the Brexit strategy to determine monetary policy, at least in the short-term.

    Other data showed that the U.K’s trade deficit widened in August as its goods deficit deepened to -£11.2B from -£10.4B in July, while its manufacturing output was -0.2% lower in August than in July, a second straight month of decline.

    Forex heatmap

    Will the bond market bloodbath resume?

    Tuesday October 9: five things the markets are talking about

    The first day back in a holiday-shortened trading week again sees U.S Treasury yields creeping higher, trading atop of their seven-year high yields. This aggressive backing up of sovereign yields this month is again putting pressure on risk assets.

    However, overnight, equities traded mixed, with Asian bourses and U.S futures on the back foot, while Euro stocks have been able to move higher.

    Yesterday saw the biggest one-day sell off in three-months of China stocks despite the People’s Bank of China (PBoC) cutting its RRR for the third time this year. Their easing actions have again put pressure on the yuan, which is sure to annoy Washington.

    The IMF has cuts world 2018 and 2019 GDP forecast by -0.2% to +3.7%. It’s the first cut in two-years as the risk of balance has shifted to the downside due to escalating trade conflicts and tighter financial conditions.

    On tap: The U.S Treasury is auctioning +$230B worth of debt this week. On Friday, the IMF and World Bank will hold meetings in Bali, with the world’s finance chiefs.

    1. Stocks mixed results

    Global risk aversion has put the yen (¥113.17) in demand, which is hurting Japanese stocks. Overnight, the Nikkei fell to a three-week low after stocks of firms with exposure to China weakened on worries about its economy while chip equipment makers tumbled, tracking weakness in U.S tech firms’ overnight. The Nikkei share average ended -1.3% lower, while the broader Topix dropped -1.8%.

    Down-under, Aussie shares have also extended their sharp declines from Monday overnight; trading atop of their four-month lows, on investor concerns over growth outlook for the country’s largest trading partner China hurt sentiment. The S&P/ASX 200 index fell -1% at the close of trade, after losing -1.4% yesterday. In S. Korea, the Kospi was closed for a holiday.

    In China, stocks rebounded overnight from Monday’s steep losses as authorities took further steps to support the economy and contain the effects of an escalating trade war with the U.S. The Shanghai Composite index closed +0.2% higher, while the blue-chip CSI300 index was up +0.3%. In Hong Kong, the Hang Seng closed down –o.1%.

    Note: Dealers attribute yesterday’s steep losses in China to investors playing catch-up after a weeklong holiday, during which a sharp sell off in global bond markets had dragged down equity markets.

    In Europe, regional bourses are trading mixed in quiet trading thus far.

    U.S stocks are set to open in the ‘red’ (-0.3%).

    Indices: Stoxx600 0% at 372, FTSE +0.1% at 7238, DAX -0.1% at 11938, CAC-40 0% at 5301, IBEX-35 +0.3% at 9232, FTSE MIB +0.3% at 19900, SMI -0.2% at 8951, S&P 500 Futures -0.3%

    2. Oil prices rise as Iranian crude exports fall, gold higher

    Oil prices remain better bid, as further evidence emerges that crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions. Also providing price support is a slow hurricane in the Gulf of Mexico.

    Brent crude is up +55c at +$84.46 a barrel, after having fallen as low as +$82.66 yesterday. Brent hit a four-year high of +$86.74 last week. U.S light crude (WTI) is up +45c at +$74.74.

    According to tanker data and an industry source, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4.

    Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

    Saudi Arabia, the biggest producer in the OPEC, said last week it would increase crude output next month to +10.7M bpd, a record. The market will wait to see if they follow through.

    Meanwhile, oil companies operating in the Gulf of Mexico have closed -20% of oil production as Hurricane Michael moves toward the eastern Gulf States including Florida.

    Ahead of the U.S open, gold prices are better bid on risk aversion amid concerns over a potential slowdown in China’s economic growth. Spot gold is up +0.2% at +$1,189.58 an ounce.

    Note: Yesterday, it fell -1.2%, its biggest one-day percentage fall since the middle of August, and also touched a more than one-week low of +$1,183.19.

    3. Sovereign yields on the move

    On the weekend, China cut its Required Reserve Ration (RRR) for major banks by -100 bps to +14.50% to prevent the country’s credit conditions from getting too ‘tight.’ The PBoC’s easing bias highlights their policy divergence with the Fed.

    The impact from Sino-U.S trade tensions is to become more noticeable in coming quarters, so an easing bias in monetary policy, coupled with an expansionary fiscal policy is expected to support China’s economy. The PBoC stated that it would continue with “prudent and neutral” monetary policy. Will investors buy into Beijing’s policy-easing measures or do they require more market-orientated reforms?

    In Italy, BTP yields have backed up to new highs after Economy Minister Giovanni Tria addressed the parliament on the government’s budget plans. He called for a “constructive discussion with Brussels over the budget” and said Italy’s “structural deficit will recover once GDP and employment returns to pre-crisis levels.”

    Italy’s five-year bond yield rose to +3.042%, its highest level in almost five-years, while 10-year bond yields hit a new 5-year high at +3.63%.

    Elsewhere, the yield on 10-year Treasuries has advanced +2 bps to +3.25%, hitting the highest in more than seven-years with its fifth consecutive advance.

    Note: The U.S treasury is to auction +$230B worth of debt this week.

    In Germany, the 10-year Bund yield has climbed +3 bps to +0.56%, while in the U.K, the 10-year Gilt yield has increased +4 bps to +1.714%.

    4. Dollar supported by yields

    The USD is maintaining its firm tone across the G10 currency pairs as U.S Treasuries are still holding last week’s gains in yields.

    Rising Italian bond yields continue to weaken the EUR (€1.1460), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place. EUR/USD is last down -0.25% at €1.1460 even though 10-year Italian yields reach +3.628%, just shy of yesterday’s 2018 high of +3.631%

    China’s effort to support its decelerating economy continues to heap pressure on the yuan. The yuan weakened beyond ¥6.93 this week, coming within striking distance of its lowest level in nearly two-years, after China moved over the weekend to free more funds for domestic banks. The currency briefly recovered to around ¥6.91 earlier this morning.

    5. German exports slipped in August

    Data this morning showed that German exports slipped for the second-straight month in August, which may suggest that, the Sino-U.S trade conflict are dampening demand for goods.

    According to the Federal Statistical Office, the total exports of goods fell -0.1% in August from the month before, while imports of goods dropped -2.7% in the period.

    Note: German exports stumbled in August despite a weaker EUR. The EUR traded around $1.14 in mid-August compared with levels around $1.25 in early February.

    Germany’s adjusted trade surplus stood at €18.3B in August, undershooting a consensus forecast of €19.0B and a surplus of €21.3B in August last year.

    Forex heatmap

    Week Ahead – Dollar Slows Down After US Jobs Miss

    The US dollar was mixed Friday. The greenback advanced against the commodity currencies (CAD, AUD AND NZD) edging higher against the CHF, but was lower agains the JPY and the EUR. The GBP deserves a special mention as positive Brexit rumours pushed it 0.61 percent higher against the USD. The American currency lost momentum as the U.S. non farm payrolls (NFP) headline jobs number disappointed with a 130,000 added positions, instead of the forecasted 188,000.

    The USD was boosted by solid fundamentals that keep pricing in a fourth rate hike in 2018. The Columbus Day holiday in the United States will shorten the trading week. US inflation data points will be the highlights with US PPI on Wednesday October 10, and US CPI on Thursday October 11.

    • UK GDP to slowdown at 0.1 percent
    • US PPI forecasted to bounce back to 0.2%
    • US inflation steady at 0.2 percent

    Dollar to Look for Inflationary Clues

    The EUR/USD is flat on Friday ahead of the long weekend in the United States. The single currency is trading at 1.1514 awaiting a long weekend and a short trading week. The US currency was supported by Fed member speeches that continue to support a fourth rate hike in 2018.



    The Fed raised rates on September 26 by a quarter of a percentage point and barring a sharp decline in economic indicators will do so again in December. The path for the US dollar for the end of the year will be unobstructed, but as 2018 begins to wrap up the strong dollar narrative is raising doubts.

    In Europe Italian budget concerns once again rose despite the government conceding to lower budget deficits in 2020 and 2021. The budget concessions also came with lower growth forecasts that pressured the stock market and sent Italian yields higher. The EU is unlikely to accept the budget without further changes, but the political climate could further complicate things.

    The EU could be fighting in two fronts. Brexit negotiations are ongoing, and despite some positive signs, are nowhere near an agreement. Opening another front by shooting down the Italian budget could be a replay of the Greek drama in 2010 but at a much larger scale.

    Loonie Falls Despite US Jobs Report Miss

    The Canadian dollar fell against the US dollar on Friday despite a rebound in Canadian employment numbers and a miss in their American counterparts.

    The loonie did advance against the greenback when the NFP report and the Canadian employment numbers were announced but as traders looked ahead to the long weekend they reduced their short US dollar exposures.


    Canadian dollar weekly graph October 1, 2018

    Canada added 63,300 positions in September driven by part time employment. The gain offset last month’s losses of 54,100 jobs that were also part time positions. The Bank of Canada (BoC) will have another solid datapoint to validate its upcoming monetary policy meeting that is being priced in at 85 percent probability of a rate hike.

    The Canadian dollar is on track to end 0.29 percent lower versus the US dollar. Despite the headline jobs miss on the NFP report, the revisions and more importantly the inflation components still support a Fed rate hike in December. The CME’s FedWatch tool shows a 81.7 percent probability, down slightly from 83.3 percent yesterday.

    Gold Higher on Dollar Stumble

    Gold rose on Friday taking advantage of a miss on the monthly U.S. non farm payrolls (NFP) report. The US economy added 130,000 jobs with market forecasts near 200,000 positions added in September.

    The yellow metal rose as the market digested the jobs report miss and put the US dollar under pressure.

    Gold will hold on to weekly gains but as a long weekend approaches due to the Columbus Day holiday investors will trim their dollar short exposure limiting the upside for commodities.



    The weakest US jobs report this year took a toll on the US dollar. The headline miss was only part of the story, wages grew as much as expected and while the lower numbers this month do not raise questions on a December rate lift by the Fed it does affect the intensity of the market focus on next week’s inflation indicators.

    Oil Higher until OPEC-Russia Confirm Production Increase

    West Texas Intermediate is rising 0.55 percent on Friday, with Brent making a smaller upwards move at 0.05 percent. Question marks about how and when will energy producers increase production to cover the supply fallout from the official start of US sanctions against Iran.

    The sanctions start on November 4, but already Iranian exports have fallen given how the US communicated that it would not tolerate any cooperation.

    The Trump administration has called out the OPEC for not doing enough to keep crude prices low, but ironically it’s the sanctions imposed by the administration that have put oil prices higher.



    On a weekly basis WTI and Brent have advanced ore than 2 percent as US Secretary Rick Perry has taken off the table the option to use the emergency oil reserves to bring prices down.

    Reports circulated that Russia and Saudi Arabia are ready to increase oil production, but if they have agreed they said nothing after the OPEC met with major producers on September 23 in Algiers.

    Oil prices will continue to fluctuate upwards until there are confirmations that energy producers are ready to offset the lost supply from Iran.

    The weekly crude inventories report will be published on Thursday at 11:00 am EDT due to the Columbus Day holiday in the states.

    Market events to watch this week:

    Wednesday, October 10
    4:30am GBP GDP m/m
    8:30am USD PPI m/m
    Thursday, October 11
    7:30am EUR ECB Monetary Policy Meeting Accounts
    8:30am USD CPI m/m
    11:00am USD Crude Oil Inventories
    Friday, October 12
    10:00am USD Prelim UoM Consumer Sentiment

    *All times EDT
    For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

    Employment: U.S miss, Canada beat expectations

    U.S unemployment rate falls to a 49-year low

    The September U.S unemployment rate fell to +3.7% from +3.9% in August, the lowest rate since 1969.

    The U.S non-farm payrolls rose to a seasonally adjusted +134K in September, the smallest gain in the past 12-months.

    It would appear that Hurricane Florence may have had a bigger than expected negative impact on September payrolls.

    Digging deeper, +150K Americans entered the labor force, keeping the number of adults working or seeking work steady at +62.7% participation rate.

    Wages

    Wages increased last month and advanced +2.8% as expected. The market was looking for a headline print of +185K and a +3.8% unemployment rate.

    Average hourly earnings for all private-sector workers increased +8c last month to +$27.24.

    Today’s solid report will likely keeps the Fed on track to gradually lift its benchmark interest rate.

    Today’s report showed the manufacturing, construction and health-care sectors added jobs last month, while the retail and leisure and hospitality lost jobs.

    Market

    Markets are swinging in both directions following the mixed report, with S&P 500 futures now down 6 points after initially gaining. The 10-year yield has backed up to +3.233% from +3.196% and the dollar also remains better bid across the board.

    Canada added more jobs than expected in September, as a sharp rebound in part-time hiring pushed the unemployment rate down to +5.9%.

    The economy added a net +63.3K jobs in September on a seasonally adjusted basis. Market expectations were looking for a net gain of + 25K on the month.

    Canada’s jobless rate eased to +5.9%, matching market expectations.

    Average hourly wages advanced +2.4% in September on a one-year basis.

    After initially rallying on the release, the loonie (C$1.2930) trades close to unchanged.

    NFP – what to expect

    Friday October 5: Five things the market is talking about

    The granddaddy of economic indicators – U.S non-farm payrolls (NFP) for September – will be released later this morning (8:30 am EDT) along with the Canadian jobs report.

    Today’s U.S number is ‘big,’ especially with this week’s aggressive backing up of the U.S yield curve. The sell-off in Treasuries, in part, has been justified by U.S data supporting the strength of their economy and the markets future inflation fears.

    This morning’s payrolls headline print, coupled with wage growth numbers, will provide substance to what investors should expect, from an interest rate perspective in particular. Does the Fed’s dot-plot line up neatly or will the Fed push its benchmark past the neutral level?

    Consensus is looking for a September headline print of +185K new jobs and an unemployment rate to ease another one-tenth to +3.8%. However, expect dealers to look beyond the headline and focus intently on the increase in average hourly earnings.

    The August wage growth print at +2.9% was the largest y/y gain in nearly a decade. If September’s number comes in even stronger, will justify some dealers fears that inflation pressures are building, maybe faster than originally perceived.

    Current expectations for wage growth m/m are +0.3%, which would equate to approximately +2.8% y/y.

    1. Stocks mixed reactions ahead of payrolls

    Euro equities are struggling for traction after the Asian session ended the week with a further sell-off overnight as the region’s tech companies were battered by concerns about their U.S business.

    In Japan, the Nikkei fell to its lowest close in a fortnight, tracking Wall Street’s slide yesterday as rising U.S Treasury yields have reduced the attraction of most stocks except financial ones. The Nikkei share average ended -0.8%, while the broader Topix dropped -0.5%.

    Down-under, Aussie shares edged higher on Friday, supported by gains from the financial sector, which managed to advance for a second session. The S&P/ASX 200 index closed +0.2% higher. The benchmark is off -0.4% for the week. In S. Korea, Kospi stock index also ended lower this morning (-0.31%) on fears of foreign fund outflows after U.S yields surged to a new seven-year high.

    Note: China’s financial markets are closed for the National Day holiday and will resume trade on Oct. 8.

    In Hong Kong, stocks fell for a fourth consecutive session, dragged by a selloff in tech stocks on fears that these companies will be the latest casualties in the Sino-U.S trade war. The Hang Seng Index was down -0.42%.

    In Europe, regional bourses trade lower across the board, pressured by rising sovereign yields. Investors will take their cue from this mornings N. American employment reports.

    U.S stocks are set to open in the ‘red’ (-0.2%).

    Indices: Stoxx600 -0.7% at 377.2, FTSE -0.8% at 7359, DAX -0.8% at 12142, CAC-40 -0.5% at 5385, IBEX-35 -0.5% at 9264, FTSE MIB -0.9% at 20438, SMI -0.5% at 9053, S&P 500 Futures -0.2%

    2. Oil prices rise on Iran sanctions, gold little changed

    Oil prices trade atop of their four-year highs this morning as traders predict a tighter market due to U.S sanctions on Iran’s crude exports.

    Brent crude oil is up +10c a barrel at +$84.68. Yesterday, Brent fell by -$1.34 a barrel or -1.6% – the contract is on course for a gain of +2.5% on the week. U.S light crude is up +30c at +$74.63, a gain of +2% on the week.

    The market remains very ‘bullish’ with speculators gunning for $100 a barrel on fears that the U.S demands for an Iran oil embargo will create a significant supply shortfall.

    Both benchmarks retreated yesterday following a rise in U.S oil indicated that they would raise output, however, pullbacks have been aggressively bought.

    Ahead of the U.S open, gold prices are little changed as the market remains cautious after U.S Treasury yields hit seven year high yesterday and on expectations that a strong U.S payrolls report could boost the Fed case for a tighter monetary policy. Spot gold has inched down -0.1% to +$1,197.64 an ounce, while U.S gold futures are flat at $1,201.3 an ounce.

    3. Reserve Bank of India (RBI) surprises

    The RBI kept its policy steady in a surprise hold this morning, but changes its stance from “neutral” to “calibrated” tightening.

    The central bank left the Reverse Repo Rate (RRR) unchanged at +6.25% (not expected) and the Cash Reserve Ratio (CRR) at +4.00% (as expected).

    It’s the first pause in three-decisions in the current tightening cycle. Governor Patel is to keep a ‘close vigil’ on inflation outlook for the coming months, as the outlook is clouded with several uncertainties. He indicated that the benefits of a weaker INR currency would become somewhat muted from a slowdown in global trade and escalating tariff war.

    INR stays near record lows as the ‘big’ dollar hit a fresh record high of $74.05 vs. $73.65 before the statement.

    The euro area bond market is heading for its worst week in five-months, with fears about tighter central bank monetary policy and strong U.S economic data will push borrowing costs to new highs.

    Germany’s 10-year Bund yield has gained +2 bps to +0.55%. In the U.K, the 10-year Gilt yield has climbed +3 bps to +1.697%, the highest in almost three-years. While further anti-E.U. rhetoric by Italy’s Deputy PM Salvini is again pushing BTP yields higher. Italy’s 10-year yield has jumped +3 bps to +3.363%.

    4. Dollar remains strong ahead of payrolls

    The ‘big’ dollar is maintaining a firm tone, trading atop of its three-month high, against G10 currency pairs ahead of this morning’s NFP print.

    EUR/USD (€1.1497) remains within striking distance of this week’s low outright. Italian anti-E.U rhetoric coupled disappointing Italian draft budget details is again providing EUR ‘bears’ with further ammo.

    GBP/USD (£1.3034) is holding above the psychological £1.30 handle as EU Brexit negotiators were said to believe that an agreement with Britain was ‘very close.’

    USD/JPY (¥113.88) remained below the ¥114 level after testing above it earlier in the week due to higher U.S Treasury rates.

    4. German factory orders

    Data this morning showed that factory orders in Germany rose strongly in August after two months of declines, boosted by strong foreign demand from outside the eurozone.
    Orders, seasonally adjusted, rose +2% m/m. That follows a -0.9% drop in July and a -3.9% drop in June.

    Note: Orders are still down -2.1% on the year, however, current data would suggest solid German growth has appeared in H2, 2018.

    Digging deeper, domestic orders dropped -2.9% in August, but that was offset by a +5.8% rise in foreign orders.

    Foreign orders from countries using the EUR dropped -2.2%, but those from non-eurozone countries rose +11.1%.

    Forex heatmap

    ADP employment increased by 230,000 in September

    Job growth surged in September to its highest level in seven months as the economy put up another show of strength, according to a report Wednesday from ADP and Moody’s Analytics.

    Private companies added 230,000 more positions for the month, the best level since the 241,000 jobs added in February and well ahead of the 168,000 jobs added in August.

    The total was well ahead of the 185,000 jobs expected by economists surveyed by Refinitiv (formerly Thomson Reuters).

    Construction grew by 34,000 as goods-producing industries overall contributed 46,000 to the final count.

    “This labor market is rip-roaring hot,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “The risk that this economy overheats is very high, and this is one more piece of evidence of that.”

    If the current pace continues, Zandi said he expects the unemployment rate to fall near 3 percent over the next year. The headline jobless rate currently is at 3.9 percent.

    The ADP/Moody’s count comes two days ahead of the Labor Department’s closely watched nonfarm payrolls report. Economists also expect that report to show job growth of 185,000.

    The jump came despite the disruption of Hurricane Florence, which ravaged the Carolinas and was expected to dent the jobs count. The nature of ADP’s methodology is such that it doesn’t include the storm victims because it only counts employees on payroll and doesn’t account for those displaced by temporary events.

    “This overstates the case a little bit,” Zandi said. He added that the actual count could come down about 25,000 once the storm impact is considered.

    Job gains were spread across industries, as services led with 184,000. Professional and business services contributed 70,000, while education and health services was next with 44,000, and trade, transportation, and utilities added 30,000. Leisure and hospitality and financial services each saw growth of 16,000.

    Businesses with between 51 and 499 employees added the most by size, with 99,000 new hires. Large businesses added 75,000 while small firms contributed 56,000.

    The August private payrolls count was revised up by 5,000.

    The report comes at a strong time for the economy, which is coming off 4.2 percent GDP growth in the second quarter a number that could be above 4 percent for the third quarter as well. Federal Reserve Chairman Jerome Powell in a speech Tuesday characterized the economy outlook among forecasters as “remarkably positive.”

    CNBC

    Turkey inflation surges to nearly 25%

    Turkish inflation surged to nearly 25 percent in September from a year earlier, official data showed on Wednesday, hitting its highest in 15 years and sharpening focus on whether the central bank will be able to deliver another hefty rate hike.

    The size of the increase – prices jumped by 6.3 percent from a month earlier – far outpaced expectations and underscored the deep impact of a currency crisis on the economy and consumers.

    The lira has lost nearly 40 percent of its value this year, hit by concerns about President Tayyip Erdogan’s influence over the central bank and a rift with Washington. The sell-off has pushed up prices of everything from food to fuel and eroded confidence in what was once a high-flying emerging market.

    “The central bank will need to react to this,” said Inan Demir, senior emerging markets economist at Nomura. “This is not something that could be ignored and they will have to hike at their next meeting.”

    The lira weakened and was at 6.0700 to the dollar, more than 1 percent weaker, at 1150 GMT.

    The currency has been underpinned in recent weeks by the central bank’s massive 6.25 percentage point rate hike last month and by hopes for an improvement in ties with the United States, particularly over the fate of a jailed American pastor.

    It remains to be seen whether Erdogan will brook another increase in borrowing costs. The president, a self-described “enemy of interest rates”, has called for lower rates to keep the economy growing.

    His repeated criticism of borrowing costs – after last month’s hike he said his patience with interest rates “had limits” – have undermined confidence in the central bank and are at the root of the lira’s slide.

    Inflation rose to 24.52 percent in September from a year earlier, the data from the Turkish Statistical Institute showed. In August, it rose 17.9 percent year-on-year.

    The month-on-month jump of 6.3 percent outstripped the 3.6 percent forecast in a Reuters poll of 15 economists.

    The numbers put the central bank’s inflation target of five percent further out of reach.

    SURGING COSTS

    “Given the scale of last month’s rate hike and continued pressure from President Erdogan for rates not to be raised further, we think that policy will be left on hold,” said Jason Tuvey of Capital Economics, adding inflation likely had a “bit further” to rise.

    In one month, the cost of food and non-alcoholic drinks rose more than 6 percent and transportation surged more than 9 percent, the data showed.

    Producer prices – a leading indicator of price change in the economy – soared more than 46 percent from last year.

    In a decade and a half in power, Erdogan and his government have built bridges, power plants and hospitals and improved the lives of millions of lower-income Turks. Early on, he won plaudits from investors for taming triple-digits inflation.

    But economists say the boom years focused more on consumption rather than productivity – that Turkey built shopping malls when it should have been investing more in factories. The lira sell-off has also put focus on the potential for a crisis at banks.

    Finance Minister Berat Albayrak, Erdogan’s son-in-law, said Turkey will announce new steps against inflation. Erdogan has called on Turks to report unusual price hikes in stores.

    U.S. PASTOR

    “The currency has appreciated and the central bank has hiked rates aggressively,” said Bernd Berg of Woodman Asset Management in Zurich. “To me the worst of currency crisis is over and we should see some stabilization.”

    Analysts are looking toward the trial of the U.S. evangelical Christian Pastor Andrew Brunson on Oct. 12.

    Brunson is charged with links to Kurdish militants and supporters of Fethullah Gulen, the cleric blamed by Turkey for a failed coup attempt in 2016. Brunson has denied the accusations and Washington has demanded his immediate release.

    The row – and Washington’s doubling of steel tariffs in response to Brunson’s detention – has added to the lira’s pain.

    Brunson’s lawyer said he filed an appeal for his client’s release from house arrest on Wednesday.

    Reuters