- The highlight today is the March US jobs data
- Geopolitical concerns are rising, but the impact on markets is unclear
- Canada also reports March jobs data
- Mexico reports March CPI, which is expected to rise 5.31% y/y
The dollar is mostly higher against the majors ahead of the jobs report. Markets remain nervous after US missile strikes on Syria. The yen and Loonie are outperforming, while sterling and Aussie are underperforming. EM currencies are mostly weaker. INR and PHP are outperforming, while RUB and TRY are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.4%. MSCI EM is down 0.3%, with China markets rising 0.1%. Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 2 bp at 2.32%. Commodity prices are mixed, with WTI oil up 1.4%, copper down 1%, and gold up 1%.
The highlight today is the March US jobs data. Consensus is 180k vs. 235k in February. However, there is risk that the jobs data is disappointing, especially after the stronger than expected ADP estimate. We suspect that the same forces that weighed on March auto sales also may have slowed net job growth; namely the weather and reversion to mean.
US non-farm payrolls rose more in January and February than in Q4 16 (473k to 443k). Better weather may have inflated February’s results, and March’s storm warns of payback. Weekly initial jobless claims also moved higher. The PMIs and ISMs showed softness in labor indicators. ADP stands as an exception, and its curve fitting tendency may be picking up the echo of past job strength while underestimating the impact of weather. There is also risk that this spills over and impacts hours worked. A 0.3% rise in hourly earnings is necessary to keep the year-over-year rate steady at 2.8%, which is anticipated.
A disappointing report means little in the grand scheme of things. Growth appears to have slowed as the consumer pulled back after a shopping spree in Q4 16. However, the Fed hiked last month, and its future course has little to do with March jobs report. No one really expects a May hike. The CME’s model suggest about 6.3% chance is discounted, and for good reason. Whatever “gradual” normalization means, it does not mean hikes at back-to-back meetings. Nevertheless, disappointment would likely weigh on the dollar.
Geopolitical concerns are rising, but the implications for global markets are a bit unclear. The US launched missile attacks on Syria in retaliation for Assad’s use of chemical weapons on civilians. There was an initial risk-off reaction on news of the strikes, but markets have since stabilized. The ruble remains down -1%, however, as US actions in Syria will raise tensions with Assad’s chief backer, Russia. We expect nervous, choppy trading conditions to continue as we go into the weekend. With Turkey also a big regional player in Syria, TRY is also suffering.
The euro remains heavy, but has not been able to break this week’s low near $1.0630. Same goes for dollar/yen despite the yen being the best performing major this week, as the pair continues to flirt unsuccessfully with the 110 level. AUD is the worst performing major this week, and appears to be headed for a test of the 0.75 level. Sterling is the second worst performer this week.
During the North American session, the US also reports February wholesale trade and inventories, as well as consumer credit. The only Fed speaker today is NY Fed President Dudley at 1215 PM ET.
Germany reported February IP, current account, and trade. IP jumped 2.2% m/m vs. -0.2% expected. Yesterday, Germany reported February factory orders. Due to a quirk, the 3.4% m/m gain was weaker than expected, while the y/y rate of 4.6% was stronger than expected. The trade and current account surpluses were both larger than expected, as exports rose and imports fell. Elsewhere, French IP disappointed, falling -1.6% m/m instead of rising the expected 0.5%.
The UK also reported February IP, construction output, and trade. IP slumped -0.7% m/m vs. the 0.2% gain expected, while manufacturing production fell -0.1% m/m vs. the 0.3% gain expected. The visible trade balance came in at -GBP12.5 bln vs. -GBP10.9 bln expected, while the January deficit was revised higher. Lastly, construction output fell -1.7% m/m vs. the 0.1% m/m gain expected, though the January drop was revised higher to a flat reading.
BOE Governor Carney warned banks to put contingency plans in place for all potential Brexit outcomes. While Carney has been accused of being too pessimistic with regards to Brexit, the recent string of weak UK data has made markets nervous. Cable has fallen every day this week except Wednesday, and is the first down week in the past four. Next near-term targets to look for are $1.2365 and $1.2300.
Canada also reports March jobs data. Consensus is 5.7k vs. 15.3k in February, but the mix is important. Last month, full-time employment rose 105.1k but was offset by a loss of 89.8k in part-time employment. The March Ivey PMI will also be reported today, with consensus at 56.0 vs. 55.0 in February.
The next BOC policy meeting is April 12. We expect the bank to maintain its dovish bias. Last month, the BOC highlighted the amount of slack that’s still left in the economy. USD/CAD is lower today after having trouble breaking above the 1.3450 area this week, failing the last three days. Break above targets the March high near 1.3535, while a failure to break it today could see a setback to the 1.3350 area.
Mexico reports March CPI, which is expected to rise 5.31% y/y vs. 4.86% in February. Banco de Mexico just hiked rates 25 bp last week to 6.5%, as expected. If inflation continues to move further above the 2-4% target range, we think that another 25 bp hike is likely. However, it may stand pat at the next policy meeting May 18 and then hike at the June 22 meeting, presumably after the Fed hikes 25 bp on June 14.