Yesterday’s data indicated further cooling in the jobs market, and, based on Christopher Waller’s hints, we should see a soft report today. We aren’t convinced markets are ready to jump aggressively into another round of dovish repricing just yet, but the should already be weaker based on current short-term swap rate differentials
USD: ADP More Important Than Usual
We noted yesterday that the slump in long-dated global bonds was unlikely to sustain dollar strength. That’s proven true – the dollar has given back some gains, and focus has shifted back to the data.
Yesterday’s US JOLTS figures confirmed the labour market is loosening. While job openings fell more than expected to 7.2 million, it’s the uptick in layoffs to 1.8 million that’s more concerning. Meanwhile, a low quit rate continues to signal wage moderation.
Expect no less interest in ADP payroll figures today, for two reasons. First, after official employment revisions, it appears that ADP data did have some decent predictive power for payrolls. Second, the Fed’s hawkish dissenter (and Chair front-runner) Christopher Waller said the weekly reports received from ADP showed continued deterioration. Consensus is for a slowdown from 104k to 68k today.
There is a risk that if ADP data points down, and payrolls surprise on the upside, markets might raise some doubts on the latter. The key question is whether the markets are ready to take rate expectations much lower. We acknowledge that the bar may be a bit higher for another major dovish repricing before the data (11 September), but the dollar appears expensive relative to its short-term rates, and we believe it has more room to fall into tomorrow’s jobs report.
EUR: Upside Risks Persist
We remain of the view that is set for a return above 1.170. As discussed above, markets might not go too aggressive on a Fed dovish repricing (unless US jobs figures are particularly bad), but there is already enough in short-term rate differentials to justify a higher EUR/USD.
Our economics team has published a preview of next week’s ECB meeting (link): we expect a hold, in line with consensus and pricing, but still think the chances of another later this year are underestimated by markets. As our Fed call is also more dovish than markets – and given the much larger room for dovish rerating in the USD OIS curve relative to the EUR one – our call remains moderately bullish on EUR/USD for the coming months.
GBP: Calm Restored, but Pound Remains Unattractive
The has rebounded in line with our call as gilts bounced back after Tuesday’s headline-grabbing slump, which was entirely in line with global bond moves.
Yesterday, Bank of England Governor Andrew Bailey confirmed the more cautious MPC stance on further rate cuts. With the UK Autumn Budget event now set for 26 November, markets have trimmed down chances of a cut at the 6 November meeting even further to 5bp, but have slightly increased those for a December cut (13bp). That follows the rationale that the announcement of growth and inflation-dampening tax rises can tilt the balance back to the dovish side for the MPC.
We still believe the BoE will cut before year-end, and while we thought yesterday’s GBP drop was overdone, the coming months will likely see multiple headlines and speculation about the content of the Budget, with elevated risks of adverse spillover into gilts and sterling. As markets may not feel comfortable completely wiping out December cut bets due to the Budget impact itself, the pound may not count on much more support from front-end rates.
Even if that may not play out in the next few days just yet, remains more likely to trade 0.870 or above rather than below 0.860 into the November Budget event.
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