Dollar Firm Ahead of Jobs Data

ISM Divergence

  • The main focus today is the US jobs data  
  • The Bank of England may have stolen any thunder from the today’s UK service and composite PMI  
  • Chinese markets re-opened from the Lunar New Year holiday; Caixin reported its manufacturing PMI at a disappointing 51.0 
  • Russia’s central bank kept rates steady at 10%, as expected; Colombia’s central bank releases its quarterly inflation report

The dollar is broadly firmer against the majors. The Loonie and Nokkie are outperforming, while sterling and Stockie are underperforming. EM currencies are mostly softer. PLN and CNY are outperforming, while HUF and ZAR are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei flat. MSCI EM is flat, with China markets reopening from the Lunar New Year holiday and falling 0.7%. Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 1 bp at 2.49%. Commodity prices are mixed, with oil up 0.5%, copper down 1.1%, and gold down 0.2%.

Ahead of the weekend, there are two series of economic reports. The first are Europe’s service PMI reports and the second is the US employment report. Neither report is likely to alter views significantly, but the latter has greater potential to move the market.

Although there is not always a good month-to-month match between the ADP estimate and the BLS private sector non-farm payroll report, the large upside surprise in the former appears to reduce the risk of a downside surprise in the latter. The median forecast in the Bloomberg survey is for a 175k increase in private sector employment (180k overall) up from 144k in December (156k overall). Our bias is toward a slightly greater job growth than the median. The revisions to back months may attract more attention than usual as benchmark revisions are announced with the January figures.

Given the current context, average hourly earnings may be of greater interest than the headline figures. Nearly 40% of the states and several cities increased the minimum wage at the start of the year. This gives a little upside risk to the 0.3% increase in average hourly wages that the median forecasts. In December, a 0.4% increase was reported for a 2.9% year-over-year rate. In the last two years, minimum wages were also lifted at the start of the year in many states. In January 2015, average hourly earnings rose 0.6%, and in January 2016, they rose by 0.5%.

It is important too to recognize the utilitarian use of data by new US Administration. President Trump had been critical of the US jobs reports during the campaign. To be fair, BLS calculates several different measures of unemployment and job creation. They all do not get reported by the media but can be found on the BLS website. It is hard to argue that there is a systemic problem with the data and simply emphasize a different BLS metric from the customary U3 measure or U6 (which measures under-employment).

Moreover, during the campaign, it was in the candidate’s interest to play down the economic improvement. Going forward, it will want to see the glass as half full, not half empty, as its own economic record is being made. And, arguably, for this President, improvement in the labor market is critical. Also, at the end of the day, it is important how policy responds to the evolving economy. In this regard, the central bank’s mandate means that its understanding of the job market (note Yellen’s expertise is as a labor economist) is more important than the White House views in setting monetary policy.

The Atlanta Fed’s GDPNow model now estimates Q1 growth at 3.4% SAAR, up from 2.3% previously. The upward revision was due in large part to the strong ISM PMI reading. Advance Q4 growth came in at 1.9% SAAR, weaker than expected and down from 3.5% SAAR in Q3. First Q4 GDP revision will come out on February 28.

The eurozone economy appears to be expanding at a stable rate, somewhat above what is regarded as trend growth. It grew 0.5% in Q4 and 1.8% year-over-year (2.0% in 2015). The final service sector reading ticked up to 53.7 from the 53.6 flash reading, while the final composite reading ticked up to 54.4 from the flash 54.3. Both France and Germany saw upward revisions that more than offset downward revisions to Spain and Italy. The challenge for monetary policy is not so much focused on growth as prices. Headline inflation has picked up, and the deflation risks appear to have passed.

However, the increases in prices do not yet appear sustainable. They, by and large, reflect energy prices and the past depreciation of the euro. Specifically, the core rate, which bottomed at 0.6%, has only been lifted to 0.9%, whereas the headline is near 2%. Moreover, later this year, as the base effect wanes, even headline inflation may ease.

The Bank of England may have stolen any thunder from the today’s UK service and composite PMI. The BOE raised its growth forecasts and still seemed to want to look through the near-term inflation overshoot. It still sees Brexit as being a drag on growth but less than previously. The January service PMI slipped to 54.5 vs. an expected 55.8, while the composite PMI slipped to 55.5 vs. 56.0 expected. The composite was still largely above the three, six, and 12-month averages (55.6, 53.6, and 53.5 respectively).   Such a report is unlikely to provide new incentives for traders or shift the focus from Brexit.

There were two developments in Asia to note. First, the BOJ appears to be playing a little cat-and-mouse with the markets. It initially disappointed by its small bond purchases, which fanned ideas that Kuroda may be backing off efforts to anchor the 10-year bond yield near zero. The disappointment saw the 10-year yield rise to 15 bp. However, the BOJ then came in and offered to buy an unlimited about of bonds and this sent yields back down below 10 bp and seemed to pull the yen lower.

Chinese markets re-opened from the Lunar New Year holiday. The PBOC drained liquidity and one-year swap rates first to the highest this year (+ 12 bp to 3.43%). The Caixin manufacturing PMI disappointed by slipping to 51.0 from 51.9 but blunting this was news that the export component rose to a two-year high. Prices also continued to rise. Given the Lunar New Year, it is often difficult to tease out the signal from Chinese January and February data. However, on balance, it appears that China’s economy has stabilized sufficiently, and the rise of producer prices is such, that officials appear poised to shift focuses to curbing credit expansion and snug monetary conditions.

Lastly, we note some large option expiries today at the NY cut (10:00 am ET). These include a yard (one billion) of euros with $1.0750-$1.0760 strikes. There are $1.3 bln on a JPY113.50 expiry. There are also GBP1.4 bln expiries at a $1.25 strike. In the Australian dollar, there are nearly A$900 mln expiries between $0.7650 and $0.7675 today. There are also $1.3 bln options struck at CAD1.3050 that expiry today.

Russia’s central bank kept rates steady at 10%, as expected. A small handful of analysts were looking for 25-50 bp of easing, but it was clearly too soon to cut rates. CPI rose 5.4% y/y in December, the low for the cycle but still higher than the central bank’s 4% target. We do not think the recently announced FX purchase plan will materially change the ruble’s direction, which will be determined mostly by oil prices.

Colombia’s central bank releases its quarterly inflation report. Colombia then reports January CPI Saturday, which is expected to rise 5.38% y/y vs. 5.75% in December. Last Friday, the central bank unexpectedly kept rates steady at 7.5% while markets were looking for another 25 bp cut. Next meeting is February 24, and 25 bp cut then seems likely if disinflation continues.