by Marc Chandler
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Overview: The stronger than expected ISM services, which the market has seemed particularly sensitive this year lifted the two-year yield to about 3.71%, its highest level since the last employment report. The 10-year yield, which had been toying with 3.80%, finally settled above it for the first time in a month. The Dollar Index extended its advance to four sessions, matching the longest in six months. The focus is on the US employment report. The greenback is mixed and is mostly consolidating against ahead of the US employment report. Most emerging market currencies have a heavier bias. The dollar may be more sensitive to a downside surprise than upside given the recent price action and short-term market positioning. That said, the Fed will see another jobs report before its November meeting.
Stocks are firmer, though were off to a less impressive start in Asia Pacific activity. Hong Kong recovered yesterday's losses and rose 2.8%. Japan and South Korea eked out a small gain, while Australia, Taiwan, and India fell. Europe's Stoxx 600 has steadied after dropping nearly 1% yesterday. US index futures are a little firmer. Benchmark 10-year yields are 2-5 bp higher in Europe and the 10-year Treasury yields almost 3.85%. Gold is trading higher in a $2654-$2668 range. Fear of further escalation of the Middle East conflict is helping oil extend its gains after rallying 5% yesterday. November WTI is near $74.50, having finished last week below $69.
Asia Pacific
Outside of the weaker than expected Australian household spending in August, (unchanged vs. expectations 0.5%) and the downward revision to July (-0.5% vs. 0.8% initially), the news stream is light today from the region. There have been two highlights this week in the region. First, Japan has a new government, which seeks a public mandate in a national election toward the end of the month. Although Prime Minister Ishida ran against Abe, he does not appear anti-Abe as some in the press depicted. In fact, given the cabinet appointments and early pronouncements, Ishida is very much part of the LDP mainstream. A supplemental budget that may include new energy subsides for households, has been tipped. And the new government is not eager for the BOJ to raise rates. The BOJ seemed to signal the same after softer Tokyo CPI, much weaker than expected industrial production, and heightened uncertainty about the global economy. Second, although China's mainland markets have been closed since Monday, the dramatic response to the stimulus continued. The index of mainland shares that trade in HK rallied another 15% this week after a 14% surge in the previous week. Beijing has successful spurred a short squeeze of the yuan and Chinese stocks. That said, many foreign economists, concerned about quantities and prices are more pessimistic that Beijing's efforts will suffice, but the critical variable, household confidence, will likely be boosted by the various measures. China's markets re-open Tuesday.
The dollar consolidated between JPY146.30 and JPY147.15 in North America yesterday. Despite the rise in US rates after the stronger than expected ISM services survey (especially the headline, prices, and new orders), the greenback was unable to reach a new session high. It returned to status quo ante around JPY146.60. It is in a JPY145.90-JPY146.90 range today. The Australian dollar set the session low yesterday in early North American turnover near $0.6830. It spent the remainder of the session below $0.6855. It barely traded above $0.6850 so far today. The daily momentum indicators warn of the downside risk. Nearby support is seen in the $0.6800-$0.6820 area, and a break could spur a move toward $0.6750. The dollar reached an eight-day high against the offshore yuan near CNH7.0650 today. The move does not seem complete. Initial potential extended toward CNH7.0740, but the risk may extend toward CNH7.10 in the coming days.
Europe
The EU holds the vote on boosting tariffs on Chinese electric vehicles later today. The EC has determined that Beijing has used unfair subsidies to support its industry and that around an increase of the tariffs to as high as 45% (varies according to producer) is appropriate. Approval requires a qualified majority of at least 15 members and representing 65% of the bloc's population. Germany and Spain have been most vocal in their opposition, and they prefer continued negotiations with Beijing. It appears, though, that rather than vote against the EC's recommendation, they will abstain, and some others may join them. Still, the EC seems confident that it has the necessary votes. A typical EU outcome would be for the EC to carry the day but continue negotiations with China. Separately, the highlight of the week has been the faster decline in eurozone CPI than expected. All four of the largest members reported sub-2% inflation, and the swaps market is confident (90%+) that the ECB will cut rates again when it meets on October 17 (and again in December).
The dollar buying after the stronger ISM services report saw the euro approach $1.10, where options for 1.75 bln euros expire today. The euro was pushed slightly below $1.1010, the lowest level since September 12, the day after the US reported the soft August CPI before being greeted by buyers who sent it back to around $1.1035. It is in a narrow $1.1020-40 range today. A close today below $1.10 would undermine the euro's technical tone. Sterling had a tough day yesterday, falling nearly 1.10%, the most since October 2023. It had fallen in the previous two sessions and looked vulnerable. Yesterday's sell-off pushed sterling through the up trendline drawn off the August and September lows (found ~$1.3210). It has stabilized today above $1.3100, though unable to rise above $1.3170. The risk remains on the downside.
America
The three-day dockworkers strike has ended, but the US employment report is front and center. With the Fed's confidence that inflation is on a sustainable path back to target, the labor market performance has taken on heightened importance. Barring a dramatic downside surprise, which the ADP estimate and weekly jobless claims argue against, the base case, as Fed Chair Powell indicated is for two quarter-point rate cuts in Q4. The US labor market is slowing but the operative word is gradual. Through August, pending revisions of July and August, US nonfarm payrolls have risen by an average of 184k this year, down from 266k average in the January-August 2023 period. The unemployment rate was at 3.8% in August 2023 and 4.2% in August 2024. Over the past year, the participation rate slipped to 62.7% from 62.8%. Average hourly earnings growth slowed to 3.8% year-over-year from 4.5% in August 2023. Ahead of the report, the Fed funds futures are discounting a little more than a 1-in-3 chance that the Fed delivers another 50 bp cut next month. That is down from about 55% at the end of last week. The market has about 66 bp of cuts discounted for the remainder of this year, down from nearly 77 bp at the end of last week.
The US dollar reached a new eight-session high yesterday near CAD1.3560 in late dealing after an option for $360 mln at CAD1.3555 expired out of the money earlier in the session. The next target is the CAD1.3600-CAD1.3650 area. Oil continued to rally, but we note that both the Canadian dollar and Norwegian krone traded heavily yesterday. The 30-day correlation of changes in the exchange rate and oil has risen to 0.30. The correlations with changes in the Dollar Index, gold, and the S&P 500 are more robust. Meanwhile, the US dollar fell against the Mexican peso for the fourth consecutive session. It traded down to MXN19.2925, its low since September 24. It is consolidating in a narrow MXN19.30-MXN19.40 range today. There is support near MXN19.25 and below it is the MXN19.00-06 area that may be more formidable. The greenback successfully tested support near BRL5.40 twice this week. It briefly traded above BRL5.51 but finished near BRL5.47. Continued broad consolidation is the most likely scenario. The markets typically do not react much to Brazil's trade figures, which will be released late today, but next week's CPI reports may be more impactful. The swaps market has about 200 bp of tightening discounted over the next 12 months, which seems a bit much.
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