by Marc Chandler
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Overview: There are two broad developments in the G10 currencies ahead of the US jobs report. The euro, Swiss franc, sterling, Swedish krona, and the Canadian dollar are in tight ranges with a heavier bias. The others are off a 0.3%-0.7%. There have been various distortions, like storms and industrial action, which exaggerated the weakness of the US labor market, which does seem to be slowing but gradually. Today's report should show a rebound, and next week's headline CPI will likely rise for the second consecutive month. We expect these reports to dampen expectations for a Fed cut this month and lift the dollar. Next week, the European Central Bank, the Swiss National Bank, and the Bank of Canada are expected to reduce rates again.
Bond markets are mixed ahead of the US jobs report. Of note, the peripheral premium over Bunds has narrowed not just today but this week. And despite the collapse of the French government, the French premium over Germany has narrowed about four basis points today and nearly 15 bp this week. At about 4.19%, the US 10-year yield is virtually flat this week. The two-year yield is near 4.17%, down slightly more than a basis point this week. Equities are mixed. All the large bourses in Asia Pacific fell but China and Hong Kong, which advanced by more than 1%. The Stoxx 600 in Europe is extending its rally into the seventh consecutive session. It is up for the third consecutive week, the longest streak in more than three months. US index futures are slightly softer. Gold slipped to a new low for the week (a little below $2614) but has recovered to session higher near $2646 before sellers in Europe pared the gains. January WTI was not impressed with OPEC+ decision to delay for the third time an increase in output (until April) and will take 16 months rather than 12 months to ramp it up. January WTI is slightly above the week's low set Monday near $67.70.
Asia Pacific
Average cash wages in Japan rose 2.6% year-over-year in October, the first increase since the peak in June at 4.5%. Adjusting for inflation, real wages were flat, after falling 0.4% year-over-year in September. It was positive in June (1.1%) and July (0.3%) for the first time since Q1 22. Yet household spending was 1.3% lower year-over-year in October after a 1.1% decline in September. That said, in Q3 GDP calculations, consumer spending rose 3.6% after rising 2.6% in Q2. These were the first increases since Q1 23. Consumption is seen slowing to around 1% this quarter. The data did not impact expectations for the upcoming BOJ meeting (December 19). India's central bank met earlier today and left its repo rate steady at 6.5%. Although Q3 growth disappointed (5.4% year-over-year vs. median forecast in Bloomberg's survey of 6.5%), October CPI came in higher than anticipated (6.21% vs. 5.49% in September and expectations for 5.9%). Over the next year, the swaps market has about 65 bp of easing discounted.
The dollar recorded an inside day against the Japanese yen yesterday and, ahead of the US jobs data, is trading inside yesterday's range. It is firm in bout a JPY149.75-JPY150.60 range. We look for the US jobs data today and next week's CPI offer a one-two punch that will dampen expectations of a Fed cut this month and support the greenback, especially against the yen. A move above JPY152 lifts the technical tone and could target the JPY154-JPY155 area. The Australian dollar also traded within Wednesday's range yesterday and was confined to about a third of a cent below $0.6455. The week's high seems distant at $0.6525. It is trading on both sides of yesterday's range today, with a heavier bias. It is threatening to slip below $0.6420. Wednesday's low near $0.6400 as the lowest since the year's low was set early August around $0.6350. The central bank is likely to see the strong household spending as confirmation of its concern that demand is outstripping supply, which may discourage participants from hardening expectations of a hike in early 2025. The futures market is pricing in better than a 50% chance of a cut in February, up from about a 33% chance at the start of the week. The broadly weaker greenback, especially against the yen, saw the offshore yuan rise to a three-day high yesterday. The dollar ground lower against the yuan beginning in the local session yesterday and carried through the European session and the North American morning. It fell to about CNH7.2540 and took that out marginally today to closer to CNH7.2525 before rebounding to almost CNH7.2670. The PBOC set the dollar's reference rate at CNY7.1848 (CNY7.1879 yesterday). Chinese officials have been setting the fix for the past three weeks well below market expectations to limit the dollar's upside. Yet, it is not clear why the average reported by Bloomberg does not reflect this. It is almost like the actual behavior of the PBOC has not impacted the survey responses. The PBOC has done this before, and it does not appear to be a strategic change but a tactic to preempt a large move in the foreign exchange market.
Europe
The eurozone confirmed the 0.4% expansion in Q3, the strongest since Q3 22. It matches last year's growth (0.4% year-over-year). The details showed stronger consumption (0.7% vs. flat Q2) and stronger gross investment (2.0% vs. -2.4%), and slower government spending (+0.5% vs. 1.2%). Separately, and less constructive, German industrial output fell by 1% in October (month-over-month) after a 2% drop in September. From a year ago, German industrial output is off 4.5% and last October it was off 4% year-over-year. The ECB and SNB meet next week. The swaps market is discounting around 10% chance that the ECB delivers a half-point cut, but odds of such a move by the SNB are hovering near 60%. The Swiss deposit rate sits at 1.0%. The swaps market has it at nearly zero by the end of next year. The Great Moderation of low growth, low inflation, and low interest rate, with longer and flatter business cycles crashed with the Great Financial Crisis but appeared to be reemerging before Covid. There have been many shocks that are still being absorbed, but if the Great Moderation is to return, Japan and Switzerland may lead. The Swiss National Bank has already threatened it would adopt negative interest rates again, if needed. Meanwhile, the swaps market is not convinced that Japan's overnight target rate will be below 0.75% at the end of next year. and may not make it to 1.0%.
The collapse of the French government had little direct market impact. The French 10-year premium over Germany narrowed by five basis points yesterday and another four basis points today. Near 74 bp, it is the lowest in almost three weeks. The euro tested the high for the week near $1.0590 yesterday. It settled above the 20-day moving average (~$1.0550) for the first time since the US election. The euro rose for the third consecutive session, which is the longest advance since October. It is subdued ahead of the US jobs report, confined to a narrow range (~$1.0565-$1.0595). Still, we suggest it is primarily position squaring and favor the downside on a solid US jobs report today. Sterling rose to $1.2770 yesterday, its best level since November 12. It met the (50%) retracement objective of the losses since the US election. The next area of technical resistance is $1.2820-35. But the upside has been limited to about $1.2775 today.
America
The slowing of the ISM services PMI was more than expected, though the prices paid index edged up, saw the market boost the chances of a Fed rate cut on December 18 to about 75% from around 66% at the end of last week. That is the most since the October CPI was reported on November 13. We expect the combination of the firm jobs report today and a tick up in CPI that will be reported next week will dampen speculation of a Fed cut, boost US rates, and support the dollar. The median forecast in Bloomberg's survey has crept up in recent days to 215k after the distorted 12k rise in October. After losing 46k manufacturing jobs in October, it is seen recouping 30k. If true it would be the most in a couple of years and the first increase in four months. Through October, the US created an average of 170k jobs a month this year. In the same 2023 period, an average of 254k jobs were grown. The labor market is slowing but gradually. The unemployment rate is expected to be steady at 4.1% for the third consecutive month. A year ago, it was a 3.7%. Average hourly earnings are expected to slip back to 3.9%, where it was in August and September before rising to 4.0% in October. It was at 4.3% a year ago. Still average wage growth continues to exceed CPI (2.6% in October and may have risen to 2.7% last month). Canada also reports its November employment data. Through October, Canada created about 272k jobs, down about 30% from the year ago period (386k). Of those jobs 215k were full-time positions this year compared with 286.5k in Jan-Oct 2023. The unemployment rate has marched higher. It bottomed at 4.8% in July 2022 and was at 5% at the start of last year and 5.7% at the start of this year. It reached 6.6% in August before slipping to 6.5% in September and October. It may have moved back to the peak last month. Ahead of the employment report, pricing in the swaps market is confident of a cut next week but is nearly evenly divided between a quarter- and a half-point move.
The US dollar tested Tuesday's low near CAD1.4010 yesterday. There are nearly $520 mln options that expire today at CAD1.40. The greenback is trading with a firmer bias today, but in a narrow range (~CAD1.4020-45). With the prospect of a half-point cut next week still substantial, barring a significant deviation of the jobs data from expectations, the Canadian dollar's downside seems to be the direction of least resistance. The greenback slipped against the Mexican peso for the third consecutive session yesterday. It fell to around MXN20.1630, its lowest level in about two-and-a-half weeks. November CPI will be reported on Monday, and it is expected to continue to trend lower. This many encourage speculation of a rate cut at Banxico's meeting on December 19, the day after the FOMC meeting concludes. The market appears to have about 2/3 of cut discounted.
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