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Expect volatility into today’s US nonfarm payrolls which Bloomberg consensus expects will slow to 300k in August from 528k in July. Upside surprises are possible because initial jobless claims fell to 232k in the 27 August week; consensus had expected a rise to 248k from 237k (revised from 243k). On a 4-week moving average basis, claims slowed to 241.5k in August from 247.5k in July. The ISM manufacturing employment index also turned positive in August (54.2 actual vs 49.5 consensus) for the first month since April. However, services employment accounts for most of NFP. Regardless of its relevance, the revamped ADP Employment did surprise on the downside in August (132k actual vs 232k consensus). Hence, we cannot rule out downside surprises too. If NFP disappoints, this could prompt speculators to take profits on their long USD positions. It remains to be seen if USD/JPY will end the week above 140. Next week will be about the central meetings in Canada, UK, and the Eurozone. The US CPI will come a fortnight later, on 13 September.
DXY appreciated 0.8% from last Friday to 109.67, its highest close since June 2002. DXY hit an intra-session high of just below 110 on the positive ISM manufacturing employment index taking the US Treasury 2Y yield to a high of almost 3.55%. However, the 2Y yield returned below 3.51% on the ISM manufacturing prices paid index plunging from 60 in July to 52.5 in August, its weakest level since June 2020. Apart from nonfarm payrolls, the US CPI data will also determine if the Fed hikes by 50 or 75 bps at the FOMC meeting on 21 September.
GBP rebounded to 1.1545 after touching 1.1499 near the lowest close (1.1485) during the Covid-19 outbreak in March 2020. GBP is more vulnerable to USD strength because of UK’s weak economic outlook and political-policy uncertainties. Bloomberg Consensus has pencilled a mild technical recession in 4Q22-1Q23, in line with the Bank of England’s guidance. The Queen will swear in the new British Prime Minister on 6 September. As per Politico’s Poll of Polls, Foreign Secretary Liz Truss is leading former Chancellor Rishi Sunak 57% to 31%. Ironically, many consider Sunak a better bet than Truss at wooing the public at the next general elections. Also, more than 60% of Tory members prefer Boris Johnson to Truss or Sunak. Assuming Truss becomes prime minister, observers believe she is too weak not to call a general election. Lawmakers are likely to resist her proposed tax cuts to support the economy on inflationary grounds and her push to review the BOE’s mandate, seen by some as a move to blame the central bank for the cost-of-living crisis.
BOE Governor Andrew Bailey will defend the central bank’s independence when he testifies to the Parliament’s Treasury Committee on 7 September. Bailey will be accompanied by Chief Economist Huw Pill, members Catherine Mann and Silvana Tenreyro. With UK CPI inflation hitting a 40-year high of 10.1% YoY in July, markets expect the BOE to deliver a second 50 bps hike to 2.25% at its meeting on 15 September. After all, the mild US technical recession in 1H22 (worse than the consensus expected for the UK in 4Q22-1Q23) did not prevent the Fed from delivering outsized hikes totalling 225 bps in March-July. Gilt yields rose faster than US Treasuries this week; 2Y rose 26.4 bps to 3.08% and 10Y by 27.7 bps to 2.88%. GBP has priced in a lot of bad news, begging the question if it deserves to head into uncharted territory below 1.15.
Quote of the day
“Beware of false knowledge; it is more dangerous than ignorance.”
George Bernard Shaw
2 September in history
US Congress established the US Treasury in 1789.
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