Currency traders are treading cautiously ahead of a non-farm payrolls report that is expected to show the US job creation engine beginning to cool, but still running far too hot for the Federal Reserve. With high inflation and ever-rising interest rates weighing on economic activity, markets think roughly 250,000 new positions were created last month, down sharply from the 440,000 average in the first half, even as the unemployment rate holds near a historically-low 3.7 percent.
Data released yesterday morning showed initial jobless claims jumping to a seasonally-adjusted 219,000 last week from a revised 190,000 in the prior week – but the four-week moving average, which smooths out weekly volatility, held near 206,000.
A series of Fed officials spent yesterday trying to crush hopes for a policy pivot in the months ahead. Governor Lisa Cook said inflation “must come down, and we will keep at it until the job is done”, Waller said rate cuts were “not something I’m considering or believe to be a very likely development”, and Mester warned “My presumption is that we will not be cutting rates next year at all”. Neel Kashkari—once known as the central bank’s biggest dove—warned that more pain would be inflicted, saying, “I fully expect that there are going to be some losses and there are going to be some failures around the global economy as we transition to a higher-interest rate environment, and that’s the nature of capitalism.”
We should note that any reaction to this morning’s non-farm payrolls report could prove evanescent. It is broadly assumed that the US labour market remains too tight for the Federal Reserve’s liking, meaning that the onus is on inflation data to slow—or accelerate—the pace of tightening. Next week’s September consumer price index release will likely have a more durable impact on market direction.
Treasuries are holding steady and the trade-weighted dollar is inching up against both the euro and pound. Wednesday’s gross domestic product report is expected to show the UK economy contracting in August, weakening even ahead of the Truss debacle.
The yen is flirting with the 145 mark as market participants play chicken with the Bank of Japan. Although we think official intervention is designed to limit volatility, not defend a specific level, a bigger-than-expected non-farm payrolls report could tip the balance in a few minutes, forcing policymakers to step in again.
Economists think Canada added roughly 20,000 jobs in September after three consecutive monthly declines. This won’t fully offset the 110,000 positions lost since May, but should stabilize the unemployment rate around 5.4 percent – even as a cratering housing market and weakening consumer sentiment raise red flags for the future. Canada’s unemployment rate has averaged close to 7.6 percent over the last five decades.
The Canadian dollar is languishing in the high 1.30’s, failing to rise with oil prices, and showing no discernible reaction to yesterday’s hawkish words from the central bank’s Tiff Macklem. The Bank of Canada governor said “We will need additional information before we consider moving to a more finely balanced decision-by-decision approach” – words that suggest additional supersized rate increases are in the pipeline, but which also signal more stress to come for the country’s terribly-indebted household sector. Front end yields climbed, but the interest rate curve inverted further, suggesting that market participants are betting on an imminent recession.
The New York Fed’s John Williams will provide an economic and monetary policy outlook at 10 am. Minneapolis’s Neel Kashkari and Atlanta’s Raphael Bostic will explore less market-focused topics later in the day.
Karl Schamotta, Chief Market Strategist