Strong US Jobs Data And Hawkish Fed Speak Keeps Tightening Expectations Elevated

US bond yields rose sharply on Friday, particularly on the front end of the curve in the wake of the above consensus US July jobs report, which showed a strong 528,000 (consensus 250,000) increase in non-farm payrolls and the unemployment rate dropping to 3.5% (consensus 3.6%).  The three-month moving average of US jobs gains now total 437,000. However, the drop in the unemployment rate was due in part to a drop in the participation rate so it wasn’t all good news.  Wage growth was firm, with average hourly earnings up 5.2% y/y. Overall the data highlighted a still strong jobs market and markets are now pricing in a greater probability of 75 basis points hike by the Federal Reserve at its September meeting. 

The firm US jobs data accompanied hawkish Fed speak over the past week, with various Fed officials pushing back against more dovish rate expectations that had been built into markets over recent weeks. The Fed’s Evans, Kashkari and Daly are scheduled to speak this week and are likely to maintain the run of hawkish Fed comments, pushing back against residual expectation of an early peak in the Fed Funds rate. Despite weaker closes for equities on Friday, stocks still ended higher over the week, but may struggle given the renewed hawkish shift in rate expectations.  That said, with the bulk of second quarter earnings out of the way equities have held up well. 

The data and Fed speakers also give further reason to be cautious on extrapolating the recent pull back in the US dollar, with the currency bouncing at the end of the week and starting this week on a firm note.  The USD index has bounced off trend line support and has bounced off its 50-day moving average level, which has been a good support over recent months.  In the near term some consolidation in the USD is likely though this week’s US CPI inflation report is likely to provide more direction.  Conversely, while the euro appears to have found a short-term bottom, it’s hard to see a significant bounce in the currency. 

Data over the weekend revealed a stronger than expected increase in Chinese exports in July at 18% y/y (cons. 14.1%) and lower imports at 2.3% y/y (cons. 4.0%), resulting in a surge in the trade surplus to $101.26bn (cons. $89.04bn).  The weak imports data highlights ongoing pressure on domestic demand while exports will likely struggle to maintain firm momentum amid a likely slowing in external demand.  China’s July inflation data this will be in focus (Wed) this week while more reaction by China to last week’s visit by Speaker to Pelosi to Taiwan will also be expected. 

In the US, the key data will be the July CPI report (Wed); the consensus expects elevated readings of 8.7%/6.1% y/y for total/core prices.  Headline CPI will have moderated from June, but core CPI is likely to have ticked higher.  Long term inflation expectations as measured in the University of Michigan August confidence survey (Fri) will also be in focus.  On the policy rate front, a 25bp hike from the Bank of Thailand kicks of its tightening cycle (Wed) and a 75bp hike from Mexico’s central bank, Banxico.  However, unlike Thailand Banxico is likely nearing the end of its tightening cycle.   

Fiscal Deadlock/China data

This week kicked off with a heavy China’s Sep data slate and Q3 GDP today.  The data releases were positive, revealing yet more signs of strengthening recovery. Industrial production, retail sales, jobs and property investment all beat expectations while Q3 GDP fell short. The data supports the view that China will be one of the only major economies to record positive growth this year. This bodes well for China’s markets and will likely also filter into improving prospects for the rest of Asia.

In contrast US recovery continues to be at risk, with fiscal stimulus discussions remaining deadlocked; a 75-minute conversation between House Speaker Pelosi and Treasury Secretary Mnuchin yielded no progress at the end of last week.  Pelosi has now given a 48-hour deadline to agree on stimulus while Senate majority leader McConnell has scheduled a Senate vote on a more targeted $500bn bill tomorrow. Talks are scheduled to continue today but there still seems to be little chance of a deal this side of elections. 

On the data front, US Sep retail sales data registered broad-based gains on Friday, with headline sales up 1.9% m/m (consensus 0.8%). In contrast, industrial production fell a sharp 0.6% m/m in Sep (consensus +0.5%).  Lastly, Michigan consumer sentiment rose in the preliminary Oct report to 81.2 from 80.4 in Sep (consensus 80.5).  The lack of a fiscal deal means that the prospects of a loss of momentum in the US economy has grown, something that will become more apparent in the weeks ahead. US data is limited this week and instead focus will remain on progress or lack thereof, on fiscal stimulus as well as the Presidential debate towards the end of the week. 

Another saga that is showing little progress is EU/UK Brexit transition talks.  The stakes have risen, with UK PM Johnson warning UK businesses to prepare for a hard exit while threatening to abandon talks completely.  On a more positive note UK officials are reportedly prepared to rewrite the contentious Internal Market Bill, which may appease the EU.  Credit ratings agencies are running out patience however, with Moody’s downgrading the UK ratings by one notch to Aa3. The pound seems to be taking all of this in it stride, clinging to the 1.30 level against the US dollar, suggesting that FX markets are not yet panicking about the prospects of a no deal transition.

Several emerging markets central banks are in focus this week including in China (Tue), Hungary (Tue), Turkey (Thu), and Russia (Fri).  Of these Turkey is expected to hike by 150 basis points, but the rest are likely to stand pat.  Most central banks are taking a wait and see approach, especially ahead of US elections. Reserve Bank of Australia meeting minutes tomorrow will garner attention too, with clues sought on a potential rate cut next month.  

Still Buying On Dips

US stocks had a positive end to the week despite the ongoing uncertainty over a new fiscal stimulus package.  A buy on dips mentality continues to hold on any sell off in equities and risk assets in general.  Although President Trump is now calling for a much larger stimulus, Treasury Secretary Mnuchin has only edged close to Democrats demands for a $2.2 trillion stimulus, by offering $1.8 trillion.  This was subsequently rejected by House speaker Nancy Pelosi.  A deal this side of the election still looks unlikely given the differences between the two sides in not just the size, but also the content of further stimulus.  Either way it’s doubtful this will stop equity markets from moving higher in the interim.

Although markets will continue to keep one eye on the approach of US elections this week – especially on whether President Trump can try to claw back some of the lead that Democratic Presidential contender Joe Biden has built according to recent polls – it is a busy one for events and data, especially in Asia.  Key US data releases include US September CPI inflation (Monday) and retail sales (Fri) while in Australia a speech by the RBA governor (Thu) and employment data (Fri) will be in focus.  In Asia monetary policy decisions by central banks in Indonesia (Tue), Singapore (Wed) and Korea (Wed) will be in focus though no changes in policy are expected from any of them. 

In Singapore, the 6-monthly policy decision by the Monetary Authority of Singapore is unlikely to deliver any major surprises.  Singapore’s monetary policy is carried out via its exchange rate and the MAS is likely to keep the slope, mid-point and width of the Singapore dollar (SGD) nominal effective exchange rate (NEER) band unchanged amid signs of improvement in the economy. Singapore’s government has announced several fiscal stimulus packages (February 18, March 26, April 6, April 21, May 26, August 17) helping to provide much needed support to the economy, with total stimulus estimated to amount to just over SGD 100bn.  Much of the heavy lifting to help support the economic recovery is likely to continue to come from fiscal spending.

In Indonesia, the central bank, Bank Indonesia (BI), has been on hold since July and a similar outcome is expected at its meeting on Tuesday, with the 7-day reverse repo likely to be left unchanged at 4%. However, the risk is skewed towards easing. Since the last meeting the economy has suffered setbacks. Manufacturing confidence deteriorated in Sep, consumer confidence has also slipped while Inflation continues to remain benign. However, BI may want to see signs of greater stability/appreciation in the Indonesia rupiah (IDR) before cutting rates further.

Chinese data including September Trade data and CPI inflation (both on Thursday) will also be scrutinised and will likely add to the growing evidence of economic resilience, that has helped to push China’s currency, the renminbi (CNY) persistently stronger over recent weeks.  Indeed, the CNY and its offshore equivalent CNH, have been the best performing Asian currencies over the last few months.  This is a reflection of the fact that China’s economy is rapidly emerging from the Covid crisis and is likely to be only one of a few countries posting positive growth this year; recent data has revealed both strengthening supply and demand side activity, amid almost full opening up of China’s economy.

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