The week ahead will likely be shaped by a combination of what happened last week and what will happen the week after next. The end of last week saw a sell-off in equities and bonds and a recovery in the US dollar. The week after next the FOMC and BOJ meet in apparently live meetings, meaning that policies may be adjusted.
The US dollar is lower against all the major currencies this week as North American participants close it out. On the day, the dollar is consolidating swings yesterday and is narrowly mixed. Bond yields are higher and equities are mostly lower.
The euro has finished lower the last three Fridays. The streak may end today. The euro has found support nearly $1.1260, and the intraday technicals favor a move higher in the US morning.
Disappointing industrial output figures from Germany and UK are helping stabilize the US dollar after yesterday’s shellacking. Investors have been fickle about the prospects for a rate hike this month, and the unexpected dramatic slide in the service spurred a downgrading of such expectations, and a flight out of the dollar. It was not simply a quest for yields, though that was part of it. Surely, the yen and euro’s strength is not a function of superior yields than the US.
The US dollar is trading heavily against most of the major and emerging market currencies. However, the losses are modest, and the greenback remains within recent ranges. The Antipodean and Scandi bloc currencies are performing best.
Several developments took place while US markets were closed for its Labor Day holiday. Most of the economic news was favorable. This included a strong snap back in the UK service PMI, more evidence that the moral suasion campaign to lift wages in Japan is yielding some success and a rise in the Caixin’s China’s service PMI.
The US dollar showed an unexpected resiliency to the disappointing August employment data. The dollar’s resilience in the face of the jobs data may reflect that many see the report did not alter investors’ or policymakers’ information set. It did not sway opinion very much for or against a move. There is not much market-moving data from the US next week outside of the ISM non-manufacturing report.
The US grew 151k jobs last month and when coupled with the 20k upward revision to the July figure the net job creation is not far from the 170k-180k median expectation.
However, the details were more disappointing. Average hourly earnings rose 0.1%. The 2.4% year-over-year increase compares with a revised 2.7% (from 2.6%) in July and is the weakest pace since March.
The US dollar is little changed ahead of the job report. Our near-term bias is for a lower dollar. Sterling is flat and is holding on to about a 1% gain this week. The Japanese yen is about a 0.3% lower and is off 1.7% this week. The euro was coming into today for the week.
The US dollar is a little softer against most of the major and emerging market currencies. The exception is the Japanese yen, where the greenback has moved above JPY103 for the first time in a month. The tone is consolidative as the market awaits assurances that the jobs growth this month has been sufficiently strong as to keep the prospects of a September meeting still alive.
The market recognizes that the indication by the FOMC at the end of last year that four rates hikes in 2016 may be appropriate was far from the mark. At the same time, investors are coming around to the prospects that the Fed is not one and done either.
A key issue for investors and policymakers is the terminal rate for Fed funds. This terminal rate is what economists call the natural or neutral interest rate. It is the rate that is consistent with full employment, capacity utilization and stable prices.
