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US jobs report the next trigger for US yields

Equity markets have had a choppy week on both sides of the Atlantic, with the Dow making new record highs, while the rest of the US has underperformed. It’s been a similar story in Europe with the upside tempered by concerns about Italian politics, rising bond yields in Italy, as well as slowing economic activity.

In contrast to Europe, the US economy appears to be on fire, blazing a trail in the sky, and sending US rate rise expectations sharply higher. This move higher in rates saw US equity markets fall back sharply yesterday, with the Dow falling the most in two months. As falls go it was still pretty mediocre, compared to declines past, however US bond yields are starting to look as if they might be about to go on a bit of a run to the upside, and it is here where most of today’s attention is likely to find its focus, with the latest US wages and jobs data due out.

This week’s break high in US 10-year yields to their highest levels since 2011, could gain further traction if we get a decent US jobs report later today. Having seen the ADP payrolls report post 230k new jobs in September, and seeing the latest ISM non-manufacturing survey post a big gain in the employment component, expectations have risen that we could well see a payrolls figure in excess of 200k, raising the expectation that September could well see the two reports combined post a figure close to 500k.

Despite this optimism it is important not to get carried away given that there has been little correlation between the two reports in recent months.

Nonetheless, it is still difficult to ignore the fact that this week’s ISM surveys were very positive on the employment side and at some point, the resilience in the surveys is likely to start to show up in the total jobs numbers, as well as in the wages numbers, while we can expect to see a continued fall in the unemployment rate. Expectations are for unemployment to fall to 3.8% from 3.9%.

As for today’s jobs report the consensus is for 184k new jobs, down slightly from the 201k in August, however it wouldn’t be a big surprise to see a number in excess of 200k. A caveat to this would be an outlier number caused by any disruption from Hurricane Florence, which may have caused some regions to delay sending their data returns through, however this would be surprise given that we haven’t seen any disruption show up anywhere else in other indicators.  

While the headline jobs number is important, the main attention will continue to be on the pace of wage growth. In the August report wages edged up to 2.9% and the highest level this year, which would suggest that a 3% handle isn’t too far away. Expectations for today are for wages to slip back to 2.8%, however this could well be temporary as we head towards year end.

Amazon’s decision this week to raise the level of the minimum wage to $15 an hour is likely to see this rise in wages happen by year end, if not before, and will in all likelihood prompt other employers to follow suit in the coming months.

It’s also a big day for the latest Canadian jobs numbers, with a good number here raising the prospect of a Bank of Canada rate rise later this month, now that concerns about NAFTA appear to have been put to bed with the agreement of the USMCA.

At the last Canada jobs report we saw a big fall in part-time jobs of 92k, while only seeing a 40.4k rise in full time employment. This was a big swing from the July report, which was more positive, and saw the Bank of Canada raise interest rates for the fourth time in two years.

Today’s Canada report is expected to see gains in both part time and full-time positions of 20k and 15k respectively, while the unemployment rate is expected to fall to 5.9%. It would take a significant miss on this report to put back the prospect of a rate move by the Bank of Canada later this month.

EURUSD – found support at the 1.1460 area and have rebounded a touch but the downside risk for a move towards the August lows at 1.1300 remains intact while below the 1.1590 level. The 1.1590 level now becomes resistance, along with the 1.1690 level as we look to head lower.

GBPUSD – unexpectedly found support at the 1.2920 level and has rebounded back above the 1.3000 level.  While welcome we still need to see a move back above the highs this week at 1.3120 to reduce the downside risk and a move towards the 1.2850 area.

EURGBP – starting to slip lower with support at the 0.8840 support level. A move below here, and 200-day MA at 0.8840 could well see further losses. Resistance comes in at the 0.8940 area with the bigger level remaining back at 0.9040.

USDJPY – came up slightly shy of the November 2017 peaks at 114.73, before slipping back. A move through 115.00 opens up a move to the 115.60 area. Support comes in at this week’s low at 113.60.

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