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Markets reverse yesterday’s reversal

A global relief rally is unwinding as markets take a more skeptical view on the likelihood of a shift in Federal Reserve policy. Early in yesterday’s session, a series of data releases helped diminish expectations ahead of tomorrow’s non-farm payrolls report and push odds on a final 2023 rate hike back below coin-toss levels: Payroll processing firm ADP said the private sector created just 89,000 jobs in September, well below forecasts for 160,000 or more. The Institute for Supply Management (ISM) services index weakened more than projected. And West Texas Intermediate prices suffered the biggest reversal this year, falling by more than $5 a barrel after the Energy Information Administration reported a bigger-than-anticipated rebound in inventories.

But veteran traders know that ADP numbers rarely align with non-farm payrolls reports (often displaying an inverse correlation), the ISM services measure remains firmly in expansionary territory, and oil inventories are far from healthy levels. On a more sober examination of the evidence, the dollar and ten-year Treasury yields are steadying, equity futures are pointing down, and oil prices are coming under pressure ahead of the North American open.

With other risk proxies turning negative and borrowing costs continuing their climb, the Canadian dollar is down again. Two- and ten-year yield spreads are tilting back in the greenback’s favour as markets express concern over Canada’s incredibly-indebted private sector – with the housing market unlikely to emerge without additional losses – and weaker oil prices are limiting the likelihood of a boom in energy investment. We think the currency is likely oversold here, but underlying momentum gauges are pointing to a test of the low 1.38’s in the near termm.

In a rather unusual development, Japan’s yen is inching higher, moving toward levels reached earlier in the week when rumours of intervention roiled markets. Policymakers are still jawboning, but there are no signs of official action yet – no “rate checks” or moves that would suggest onshore institutions are front-running the central bank.

The euro is also staging a modest recovery, holding above the psychologically-important 1.05 mark against the dollar against a quiet domestic data backdrop. Gains could be limited: Although a flock of European Central Bank officials are scheduled to speak over the next day and a half, markets are largely convinced policymakers will now stay on the sidelines, and any hawkish rhetoric will be taken with a handful of salt. And the spread between German and Italian yields remains elevated, suggesting that funding issues in some of Europe’s most-indebted countries will keep risk premia elevated.

Ahead today: After the latest initial jobless claims report at 8:30, Fed speakers will include Cleveland’s Mester, Minneapolis’ Kashkari, Richmond’s Barkin, San Francisco’s Daly, and Vice Chair Barr.

Although today’s price action looks consolidative in nature, we would warn that recent rallies in Treasury yields and the dollar are sowing the seeds of their own destruction. Spectacular increases in borrowing and cross-border funding costs raise the risk something will break in the global financial system, and will ultimately increase the odds on a climbdown from the Fed. We can have a “soft landing” or “higher for longer”. We can’t have both.

Still Ahead


Initial claims for unemployment benefits should begin rising in coming weeks as the Big Three automakers begin laying off non-union employees, but the increase shouldn’t yet appear in this morning’s data, which will cover the week ended September 30. Consensus forecasts are pointing to a print close to 210,000, up incrementally from 204,000 in the previous week. (08:30 EDT)


The US job creation engine probably slowed further in September, with just 160,000 people added to non-farm payrolls, down from 187,000 in August. The unemployment rate and monthly average hourly earnings growth are seen holding at 3.8 percent and 0.2 percent, respectively. (08:30 EDT)

Data released in synchrony with the US non-farm payrolls report should show conditions worsening in Canada’s labour market, with job growth slowing from August’s surprising 39,900-position gain, and the unemployment rate ratcheting higher up to 5.6 percent from 5.5 in the prior month. (08:30 EDT)

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