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Directional momentum slows into US payrolls report

Happy non-farm payrolls day, to all who celebrate.

Ahead of the most important release on the monthly economic calendar, markets are working to demolish the Federal Reserve’s “higher for longer” narrative. Investors, apparently comforted by Jerome Powell’s words during Wednesday’s post-meeting press conference, have dramatically lowered odds on another interest rate hike in the coming months, and have moved to add two rate cuts to 2024 – in addition to the two already priced in. After breaking above 5 percent for the first time since 2007 last week, ten-year Treasury yields have lost almost 35 basis points, marking one of the sharpest reversals in decades.

A rebound could come in the next half hour if the payrolls number surprises to the upside, but technical positioning suggests that market participants will remain committed to top-ticking yields – at least until loosening financial conditions force the Fed into a more hawkish communications response.

Economic consensus suggests that the US generated around 160,000 new positions last month, but the “whisper number” circulating on Wall Street is likely higher, perhaps closer to 200,000. Beyond the knee-jerk market reaction, we’ll be watching the jobless rate more closely, with a move above 4 percent likely to trigger the “Sahm Rule” recession indicator, which specifies that a downturn is almost certainly underway once the three-month average unemployment rate climbs 0.50 percentage points or more off its low during the previous 12 months. The risk-reward calculus has shifted in the last few days, with softer-than-anticipated data likely to add momentum to the decline in yields, with corresponding effects on the still-overvalued dollar.

Canada is seen adding between 20- and 30,000 jobs over the same time period, with the unemployment rate ticking higher to 5.6 percent from 5.5 percent in September on continued growth in the labour force. Year-over-year wage growth – a key input for the Bank of Canada – is expected to remain above 5.2 percent, helping maintain the central bank’s hawkish bias even as other indicators point toward a downturn ahead.

The loonie could – and should – move higher on a more supportive technical backdrop, but we would caution that the jump in global borrowing costs over the last six months has likely inflicted lasting damage on the economy. Rallies should be harnessed for tactical purposes, but longer-term headwinds should see the currency ultimately revert lower.

More survey data will drop later in the morning, including S&P Global’s October services and composite purchasing manager indices at 9:45, and the Institute for Supply Management’s services index at 10:00. These should show a deterioration in sentiment, in line with the depressing responses seen in manufacturing surveys earlier in the week, but should also be taken with a grain of salt, given ever-widening differential between what businesses and consumers say they will do, and what they actually do.

We note that the cadence of important economic data releases is set to slow dramatically next week, with rate decisions in Australia and Mexico, along with a British gross domestic product report looming as the only major events on the calendar. Australia’s might garner outsized scrutiny – given that the Reserve Bank of Australia has tended to function as a “canary in a coal mine” for global rates in the last two cycles – but markets will more likely focus on a raft of appearances from Federal Reserve officials now released from pre-meeting blackout requirements. After helping jawbone long-term yields back into a more comfortable range, we could see a number of policymakers backing off the dovishness that had begun to creep in around the edges in the last month.

Correction note: Yesterday’s note wrongly said it was October 31. I’ve always been as date-challenged as an Excel spreadsheet. I apologize for the error.

Still Ahead


The Reserve Bank of Australia is widely expected to re-initiate its monetary tightening campaign after inflation accelerated in the third quarter, with market consensus supporting a 25 basis point increase in the cash rate target to 4.35 percent. This is a reasonable base case, but with consumer spending softening, employment conditions easing, and housing markets remaining structurally vulnerable, officials may opt to hold long-run price projections near current levels – a move that might lessen the need for higher rates in the short term. (22:30 EDT)


Mexico’s central bank is likely to continue conveying its own version of the “higher for longer” message, holding its benchmark rate at 11.25 percent for a fifth consecutive meeting and warning markets to expect more of the same until well into 2024. Until the US slows in a meaningful way, we don’t see this changing: with inflation expectations remaining above target and the domestic economy performing well on growing remittances, exports, and investment, there’s little need to follow other emerging market central banks into a cutting cycle, and supportive yield differentials are helping sustain strong inward capital flows. (14:00 EDT)


The British economy may have entered the early stages of recession in the third quarter, with gross domestic product seen shrinking -0.1 percent after expanding 0.2 percent in the second. Further declines are likely in the new year as the consequences of the Bank of England’s tightening efforts hit home. (02:00 EDT)

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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