Expect U.S Jobs to be Affected By Summer Hurricanes

Thursday October 5, 2017: Five things the markets are talking about

The U.S. dollar continues to fluctuate against the major currencies as investors pause ahead of tomorrow’s North American jobs data. Minimal non-farm payroll (NFP) risk is being priced in to USD majors, as seasonal factors and recent hurricanes may give the data less credence.

One in 13 U.S workers are employed in counties ravaged by this summer’s hurricanes in Florida and Texas.

Yet, any signs of solid U.S jobs growth will help justify an additional interest-rate increase by the Fed again this year. The U.S economy added +156k jobs in August while the unemployment rate held at +4.4%.

Note: The median forecast for tomorrow’s release is a +80k gain in NFP, less than half the average +182k rise since the start of last year.

Fed fund futures is pricing in a +78% probability that the Fed will hike interest rates by the end of the year, up from around +44% last month.

Elsewhere, elections in the eurozone have rattled currency markets recently. The EUR (€1.1774) outright trades atop of this week’s intraday low after an illegal independence vote in the Spanish province of Catalonia took place on the weekend. The prospect of secession has increased pressure on PM Rajoy while rattling Spanish markets.

Note: That came a week after the ‘single unit’ was jarred by German Chancellor Merkel’s conservative alliance losing ground in the federal election. Austria’s legislative election this month (Oct 15) and Italian elections expected to be held by May 2018 could also raise risks for the EUR.

Investors are also watching for developments as President Trump considers replacing Fed Chairwoman Janet Yellen. The U.S administration has interviewed former Fed governor Warsh and Fed governor Powell about taking the helm at the Fed.

1. Stocks stay close to home

Japan’s Nikkei share average ended little changed (-0.1%) overnight after hitting a two-year high Wednesday – investors remain cautious ahead of tomorrows U.S data. The broader Topix fell -0.1%.

Note: The Shanghai Composite and Korea Kospi remained closed for Golden Week, while the Hang Seng was closed for a holiday.

Down-under, Australia’s S&P/ASX 200 slipped -0.1%, pressured by financial and energy shares.

In Europe, regional bourses are little changed with banking shares underperforming while utilities are supporting. Investors seem to be getting used to uncertainty in Catalonia as peripherals return to positive.

Note: Market attention is turning to ECB minutes to be released at 07:30 am EDT and tomorrow’s release of non-farm payroll (NFP).

U.S stocks are set to open unchanged.

Indices: Stoxx600 -0.3% at 389.3, FTSE +0.1% at 7477, DAX -0.2% at 12940, CAC-40 -0.1% at 5359, IBEX-35 +0.4% at 10005, FTSE MIB -0.1% at 22429, SMI -0.3% at 9254, S&P 500 Futures flat

2. Oil steady as talk of new OPEC deal balances U.S exports, gold unchanged

Oil prices are steady on expectations that Saudi Arabia and Russia would extend production cuts, although record U.S exports and the return of supply from a Libyan oilfield are dragging on the market.

Brent crude is up +20c at +$56.00 a barrel, while U.S light crude (WTI) is unchanged at +$49.98.

Note: Both crude benchmarks have fallen more than -5% over the last week as investors booked profits after almost three months of gains.

The Energy Information Administration (EIA) said yesterday that U.S crude oil exports jumped to +1.98m bpd last week, surpassing the +1.5m bpd record set last week.

Ahead of the open, gold is holding steady within a tight trading range as the ‘mighty’ dollar holds firm on stronger U.S services sector growth data Wednesday, as investors wait for tomorrow’s key U.S employment data. Spot gold is at +$1,274.11 an ounce.

3. Sovereign yields remain atop lofty heights

Firming expectations that the Fed will hike rates in December coupled with domestic data pointing to steady growth in the U.S and talk of a potentially more ‘hawkish’ successor to Fed Chair Janet Yellen is helping to support higher U.S yields.

Ten-year yields are trading atop of +2.33%; it’s highest yield since mid-July, which has also pushed the dollar higher against G10 currencies. Elsewhere, Germany’s 10-year yield gained +1 bps to +0.46%, the highest in a week, while
Spain’s 10-year yield climbed less than +1 bps to +1.789%, the highest in more than six months.

Note: The volatility of Spanish government bonds is to become stronger; with yields potentially rising further versus its regional peers (Italian BTP yields) if the standoff between Catalonia’s regional government and the central government escalates.

4. Dollar trades in a tight range

Sterling (£1.3190) is trading close to its three-week low on reports that over two dozen U.K members of parliament are prepared to call for PM May to resign before the end of 2017. With the Tory party conference concluded; the market focus has swung back to Brexit and the negotiations. Germany’s BDI Industry Association noted that it had concern at current Brexit talks and added that German companies with presence in U.K must make provision for the possibility of a hard Brexit

The EUR (€1.1766) trades steady despite the Spanish region of Catalonia threatening to declare independence next week. Should Catalonia turn independent, the E.U would have to apply the ‘Prodi doctrine’ from 2004, suggesting Catalonia would leave the E.U and the Eurozone.

Down-under, AUD is trading atop of its two-month low outright (A$0.7820) after last nights Aussie retail sales headline missed market expectations -0.6% vs. +0.3% m/m.

5. U.K new car registrations slides in September

U.K. new car registrations fell sharply in the key month of September for the first time in six-years. New registrations fell -9.3% to +426,170 units. September is a key month of the year, which normally accounts for up to +20% of annual demand, making it highly likely sales this year will be down for the first time since 2011.

Business and political uncertainty is reducing buyer confidence, with consumers and businesses more likely to delay big ticket purchases.

The figures show a fall in registrations of petrol vehicles of -1.2%, with diesel declining by -21.7%, while demand for alternatively fuelled vehicles was up +41%. Year-to-date, new car registrations have fallen -3.9%.

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