USD continues to correct lower on back of softer US labour market data

USD: US labour market softening provides offset to growth fears outside of US

The US dollar has continued to trade at weaker levels during the Asian trading session after the recent bullish trend suffered another setback yesterday. After hitting an intra-day high of 104.45 on 25^th August the dollar index has since fallen back towards support from the 200-day moving average that comes in at around 103.10. The setback for the US dollar has mainly been driven by further signs that the US labour market is softening which helps to ease pressure on the Fed to keep tightening policy. The JOLTs report for July revealed a sharper than expected decline in job openings, and the rate of hiring and employees quitting their jobs. It has given market participants more confidence that the NFP report on Friday is more likely to provide further evidence of slowing employment and wage growth. Those expectations have been reinforced by the release yesterday of the softer ADP survey for August which has estimated private employment growth of 177k. It follows four consecutive months when the ADP survey surprised significantly to the upside. However, as we have seen in recent months the ADP survey has not been an accurate leading signal for non-farm payrolls. In June and July, the ADP survey overestimated non-farm private employment growth by 250k per month on average when looking back at the figures when they were first released. However, the latest ADP survey reading is more in line with the recent trend for non-farm private employment growth which has averaged 185k/month over the last three months and 205k/month so far this year.

A similar ballpark figure on for Friday’s NFP report is unlikely to alter expectations for the Fed to leave rates on hold in September. The US rate market is currently pricing in only 3bps of hikes for the September FOMC meeting and 13bps hikes by November as market participants continue to view it as a close call as to whether the Fed will deliver one final hike later this year. The weaker JOLTS and ADP surveys have triggered a modest dovish repricing of Fed policy expectations but the shift is not sufficient to triggered a sustained reversal of the US dollar’s recent bullish trend that has been mainly driven by heightened concerns over growth outside of the US while the US economy has remained resilient to higher rates. The loss of growth momentum in China is attracting more attention both from market participants and domestic policymakers who continue to announce additional support measures. Bloomberg has reported that China’s local government are accelerating the pace of borrowing for infrastructure investment. According to Bloomberg, Beijing has set a September deadline for regions to issue their remaining allocation of special bond issuance for the year. Local governments stepped up issuance of special bonds to CNY520 billion in August which are mainly used to financial infrastructure projects. It is the latest policy step announced to provide more support for growth in the 2H of this year but the steps have not yet proven sufficient to significantly alleviate investor pessimism. The latest PMI survey from China released overnight revealed that business confidence in August remained close to year to date lows.        

The next focus for the US rate market and the US dollar ahead of the NFP report on Friday will be the release today of the latest US PCE deflator report for July which is expected to show both the headline and core rate increasing by 0.2%M/M. In recent months the PCE report has revealed a clear step down in the rate of core services less housing inflation which if repeated in today’s report will give us more confidence that the improving inflation outlook will open the door for the Fed to begin lowering from next year supporting out forecast for further US dollar weakness beyond the near-term.  

DXY VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

EUR: CPI report in focus ahead of finely balanced September ECB meeting

The main economic release this morning during the European trading session will be the latest euro-zone CPI report for August. The release yesterday of the national CPI reports were broadly in line with consensus expectations for headline inflation to ease to 5.1% and core inflation to 5.3% in August. One broad-based upside surprise that was evident in the national CPI reports was energy prices driven by notable increases in fuel prices. In contrast there was further evidence that food inflation continues to slow. The pick-up in energy inflation if it continues heading into year end would be an uncomfortable development for the ECB at a time when core inflation is still close to cyclical highs and well above the ECB’s inflation target. The risk of more persistent core inflation was reinforced as well earlier this week by the release of record wage growth data from Germany for Q2 that expanded by an annual rate of 6.6%. The developments are keeping alive market expectations for the ECB to deliver one final rate hike this year although a hike as soon as next month is still viewed as a close call. The euro-zone rate market is currently pricing in 15bps of hikes for September and 22bps for December. We are still expecting the ECB to leave rates on hold in September but to leave the door open to a hike later this year. Admittedly it is a close call. Our call for the ECB to remain on hold in September reflects recent rhetoric from the ECB indicating that the policy rate is now sufficiently restrictive, the increased risk of renewed GDP contraction in Q3 and weak money supply data. An hold decision poses some modest downside risk for the euro in the near-term.    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	08:15	BoE MPC Member Pill Speaks	--	--	--	!!
GE	08:55	German Unemployment Change	Aug	10K	-4K	!!
EC	10:00	Core CPI (YoY)	--	5.3%	5.5%	!!
EC	10:00	CPI (YoY)	Aug	5.1%	5.3%	!!!
EC	12:30	ECB Publishes Account of Monetary Policy Meeting	--	--	--	!!
US	13:30	Initial Jobless Claims	--	235K	230K	!!!
US	13:30	PCE Price index (YoY)	Jul	3.3%	3.0%	!!
US	14:00	Fed Collins Speaks	--	--	--	!

Source: Bloomberg