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Market Briefing: Markets Stabilize as Payrolls Report Looms

Yields are flat and the dollar is holding steady after hitting multi-decade highs during yesterday’s trading session.

This morning‘s non-farm payrolls report is expected to clear the way for a three-quarter-point hike at the Federal Reserve’s September meeting. Economists think the US economy generated 290,000 jobs and the unemployment rate held at around 3.5 percent in August, with the labour market proving robust amid a central bank-engineered tightening in financial conditions. Data released yesterday showed initial jobless claims, a proxy for layoffs, falling to a seasonally adjusted 232,000 last week from 237,000 the previous week.

Financial markets might welcome signs of decelerating job growth, with a relief rally likely if the print comes in below the 150,000 mark. A hotter-than-expected print will almost certainly deepen the last week’s selloff as traders position for a faster and more sustained monetary tightening cycle.

The Japanese yen is poised on the verge of further declines after breaking through the 1.40 threshold yesterday – a level last seen in 1998. The move has elicited expressions of discomfort from some policymakers, but the sort of verbiage that preceded prior intervention efforts – words like “excessive”, “disorderly”, or “one-sided” has been largely absent (see an excellent Bloomberg piece on the language that was historically used in the run-up to official policy shifts here). The Bank of Japan isn’t convinced that imported inflation pressures will be sustained – or that wages will rise materially in the short term – meaning that extraordinarily-loose monetary policy settings remain appropriate, even if differentials with the US widen. Jawboning efforts are likely to increase in number and volume, but policy changes look unlikely for now.

Oil prices are climbing, with both major benchmarks showing daily gains of around 2 percent. Hopes for a nuclear deal with Iran faded slightly overnight after the US State Department said Tehran’s latest response was “not constructive”, and Saudi Arabia is expected to call for output cuts when members of the OPEC+ group of exporting countries meet on Monday. Prices have fallen back to pre-war levels over the last month on an erosion in global demand conditions and continued flows from Russia into global markets.

Canada’s loonie is inching up, but implied volatility levels remain elevated and bears are firmly in charge of the trading narrative. The currency has weakened sharply in recent weeks, with a rising greenback, tumbling commodity prices, and slowing economic momentum combining to force the exchange rate into a new and more defensive trading range. Economists remain convinced the Bank of Canada will succeed in executing a widely-desired (and semi-mythical) “soft landing” in which inflation comes down without a major downturn, but currency traders are more skeptical.

The euro is clinging to parity, lifted by confirmation gas will begin flowing through the Nord Stream 1 pipeline again tomorrow morning. The pipeline’s operator has reportedly filed shipment orders for volumes roughly in line with pre-shutdown levels, and Russian policymakers have used supportive language in recent days. Traders are assigning circa-70 percent odds to a three-quarter-point hike at the European Central Bank’s meeting next week ad the economic bloc struggles to counter a historic rise in energy prices.

Investors think US factory orders increased 0.2 percent in July from the prior month. Data out at 10 am is expected to show consumer demand for durable goods going from strength to strength even as real incomes fall.

Trading volumes are likely to plunge shortly thereafter as North American market participants abandon their desks for the Labour Day weekend. Enjoy it while it lasts – September could prove very interesting for currency market participants.

Karl Schamotta, Chief Market Strategist

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