Market Brief: Dollar Gains Slow As Data Releases Accelerate
The dollar is softening against a turbulent month-end backdrop after the number of US job openings fell in September, while consumer confidence increased. Treasury yields are off their recent highs, and North American equity futures are setting up for a constructive open after Alphabet - Google’s parent company - beat earnings expectations in the third quarter, reinforcing market confidence in the US technology sector.
Yesterday’s Job Openings and Labor Turnover report helped reinforce scepticism surrounding September’s outsized jump in non-farm payrolls. According to the Bureau of Labor Statistics, the total number of vacant jobs dropped by 418,000 to 7.44 million in the month, and the August number was revised down to 7.86, well below the 8.04 million previously estimated. The quits rate fell to 1.9 percent from a revised 2.0 percent in the prior month, reflecting an erosion in employee confidence, and the layoff and discharge rate rose to 1.2 percent - still historically low, but headed in the wrong direction ahead of the October payrolls report.
Forecasts for Friday’s print are all over the map - from a loss of 10,000 positions, to a gain of more than 180,000 - but risks are clearly biased to the downside relative to the prior month. The lagging impact of Hurricane Helene and the approach of Milton during the survey week are believed likely to have delivered a serious hit to employment numbers, pairing with the ongoing Boeing strike and ongoing softening in labour market demand to weaken job creation rates and put upward pressure on the number of workers on temporary or permanent layoff.
Consumers nonetheless seem to be turning more optimistic. The Conference Board’s Consumer Confidence Index rebounded solidly in October, jumping by the most since March 2021 as household views on current conditions, job availability, and future conditions all turned dramatically more positive. This is subject to all of the caveats laid out in yesterday’s note, and could be partly driven by Donald Trump’s advance in the polls, but - combined with today's third-quarter gross domestic product report - should help keep expectations for Federal Reserve rate cuts anchored around quarter-point increments. Simply put: upside potential in the US economy remains significant, lowering the need for an emergency-style response from policymakers.
Odds on an outsized rate cut at the European Central Bank’s December meeting are down sharply after the economy outperformed expectations in the third quarter. Data released this morning showed the euro area expanding 0.4 percent in the three months ended September as Germany unexpectedly avoided recession while the French and Spanish economies grew more rapidly than forecast. Inflation is seen ticking up slightly when bloc-wide numbers are published tomorrow. Market-implied probabilities on a half-percentage-point move in December are down to less than 25 percent from yesterday’s 40 percent, and the common currency is trading back above the 1.08 threshold as traders bet on a less-aggressive easing trajectory.
The pound is trading defensively ahead of the new Labour government’s first Autumn Budget. Finance minister Rachel Reeves is expected to outline a plan containing roughly £35 billion in annual cost savings and tax increases, paired with £70 billion in new borrowing over a five year period. This is believed likely to translate into a small improvement in growth rates without materially endangering the UK’s ability to access financial markets, but investors remain nervous: the spread between ten-year gilt yields and their German bund equivalents is sitting at around 190 basis points, down from recent highs - and below the peak seen during the ‘Truss debacle’ in 2022 - but still well above historical averages.
The Canadian dollar is advancing in line with its major counterparts against the dollar after trying - and again failing - to break through support levels in the low 1.39’s. Deteriorating rate spreads have hammered the currency lower over the last week, but without a major catalyst - potentially provided by Friday’s US non-farm payrolls report or next week’s election outcome - traders remain hesitant to push the exchange rate through the 1.40 threshold. Scepticism on the Canadian economy remains well-warranted, but the growth outlook is turning more positive as the Bank of Canada’s easing efforts translate into improving consumer sentiment. In Parliamentary testimony yesterday, Governor Tiff Macklem said, “You are starting to see some impact (from cuts). Some of it is more anecdotal - I expect we will see more in the data going forward," and “We want to see growth strengthen. Last week's interest rate decision should contribute to a pickup in demand”.
From a broader perspective, it is important to note that rising US yields are anchoring rates higher across most advanced economies. The US ten-year has jumped significantly since the September Federal Reserve meeting, but so have equivalent rates in China, Japan, the euro area, Canada, the United Kingdom, and Australia. The ongoing adjustment in foreign exchange markets should mostly be viewed as a shift in expectations for the US economy - namely, continued outperformance leavened with a dollop of inflation risk and a helping of fiscal concern - rather than a downgrade in forecasts for other major economies.
Crude prices are coming under pressure for a third day on a further easing in Middle Eastern geopolitical tensions. According to Axios, officials with the Israeli Defence Forces have provided recommendations to Prime Minister Benjamin Netanyahu and Defence Minister Yoav Gallant suggesting that a ceasefire agreement with Hezbollah would help avoid dragging the country into a protracted ground war in Lebanon - helping set the stage for a US-negotiated settlement in the coming weeks. From a regional perspective, Iran’s proxies in Gaza, Lebanon, and Yemen have been significantly degraded in recent months, and the weekend’s airstrikes are believed to have left the country’s airspace “essentially naked,” making Tehran less likely to threaten global oil supplies.
Lastly, reports out of China are suggesting that authorities are planning to approve a significant boost in fiscal stimulus once the outcome of the US election is known. According to Reuters, the central government is expected to increase spending by almost $1.4 trillion between now and 2026 - an amount equivalent to roughly 2.6 percent of annual gross domestic product - and is prepared to ratchet this higher if Donald Trump wins next week’s election.
To us, this complicates the current dollar-bullish consensus. If China, Germany, and other fiscally-conservative exporting countries respond to Trump’s protectionist plans with increased government spending - particularly if directed toward supporting domestic consumption - relative growth differentials could gradually narrow against the United States, and ultimately put downward pressure on the greenback. On a net basis, China’s contribution to the global liquidity impulse - proxied using M2 money supply growth - is already strongly positive, and could rise further in the coming months, boosting activity in the emerging markets and giving investors a number of investment alternatives to the dollar.
Please note: due to a scheduling conflict, I will not be publishing a reaction note after this morning's UK budget or US gross domestic product print - but I'm sure that comes as a relief after seeing the length of this one : )
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