The US Jobs Market Is Tightening But North Korean Worries Overshadow

Originally published by AxiTrader

Welcome to my Daily Markets Musing – coming to you from Singapore.

I’ve written this Sunday so it could be a little out for the Monday morning open. Especially if Kim Jong-un follows through on what the Russians say is his next planned test of an ICBM capable of hitting the west coast of the US. Or if traders get wi=orried about President Trump’s weekend tweet.

Feedback always welcome, have a great day

Greg

US non-farm payrolls fell by 33,000 last month. That’s the first fall in 7 years. But that weakness belied an otherwise positive take on what was a messy, hurricane impacted, release of the single most important data point in the globe each month. Unemployment fell to 4.2%, a 16 year low. And wages growth accelerated to a 2.9% yoy pace after Septembers 0.5% gain on the month.

Initially, it helped the US dollar surge and US bond rates rise. But traders backed off as worries again surfaced after Russian politicians who had just been to Pyongyang said Kim Jong-un was readying his next ICBM test – one that could hit the west coast of the USA.

So in the end the US dollar closed well off its highs, US 10-year treasuries backed off an important break at 2.4%, while the S&P 500 and Dow Jones Industrial Average printed in the red for the first time in almost 2 weeks. To wit the S&P 500 was 0.1% lower at 2549, the Dow dipped by the smallest of margins – 0.01% - to close at 22,773 and the Nasdaq 100 eked out a 0.12% gain.

On bond markets US 2's closed at 1.5120% and US 10's closed at 2.36% after peaking at 2.4020%. The curve is at 85 points.

On currency markets the US dollar's reversal saw it finish at 93.795 in US Dollar Index terms and 1.1733 in euro terms after a low around 1.1668 – just above important support. USD/JPY had another failure above 113 and closed at 112.63, while the pound was largely unchanged. The Aussie and kiwi bounced from their lows but remain well offered on rallies it seems. The Aussie closed the week at 0.7769 – a little more than 100 points off the week’s high and 40 points off Friday’s low.

On commodity markets the Saudi and Russian clarification of their position on an extension of the production cut deal and another Hurricane hitting the US saw WTI prices collapse close to 3% to $49.29 while Brent had an ugly outside day and closed at $55.62. Gold found a bid in North Korea tensions and a turnaround in the US dollar it closed the week at $1275, while copper dipped a little but finished at $3.01 as traders await the return of Chinese markets from their week off.

Looking at the week ahead the Caixin PMI’s today are going to be big. I’m looking forward to tomorrow’s NAB business survey and Wednesday’s Westpac Consumer Sentiment survey to see if they confirm or deny last weeks awful retail sales data.

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But this is really a week of central bankers who are seriously busy chatting in numerous speeches from important ECB, BoC, BoE, and of course Fed speakers. Check your calendar - it’s out of control the number of central bank speakers we see this week. And that’s even before and important data week including German and Chinese trade, monthly inflation in a raft of countries including the US PPI and CPI, plus retail sales from the US.

We’ll have a much better feel for the outlook for foreign exchange and bond markets by the end of the week.

• Before I get to non-farms we’ve has an escalation in tensions again between the North Koren’s and the US. On Friday US time Anton Morozov, a member of the Russian Duma, who had been in Pyongyang with two other parliamentarians said the DPRK is “preparing for new tests of a long-range missile. They even gave us mathematical calculations that they believe prove that their missile can hit the west coast of the United States," He went on “As far as we understand, they intend to launch one more long-range missile in the near future. And in general, their mood is rather belligerent”.

• Of course, that was always going to get a reaction from President Trump who said “only one thing will work”. Let’s hope not.

• US non-farms unexpectedly fell by 33,000 in September when forecasters had been expecting a rise of around 80,000 jobs. But while the headline tipped non-farms into the red for the first time in years it was the growth in wages and the fall in the unemployment rate which is the big story. At 4.2% the unemployment rate is the lowest since Fed 2001 and in a region where except for the most dovish policymakers genuine concerns can be aired about an eventual uptick in wages inflation. And as if on cue we saw the second half a percent monthly rise in hourly earnings in the past 3 months which took the year on year rate to 2.9%.

• So is it any wonder that we again heard from Fed speakers talking up the chances of a rate hike in December and then more rate hikes again in 2018. Of course, ST Louis Fed president James Bullard is not on board and it’s unlikely Neel Kashkari is either. But many other Fed speakers are. NY Fed president Bill Dudley highlighted what I think is the majority view Friday when he said “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually”. Remember this is a Fed that watched rates held too low for too long after the early century rate reductions cause the GFC. It does not want to preside over a similar outcome somewhere else in the financial system. And as Janet Yellen and other colleagues have said recently it is better to hike gradually than have to play aggressive catch-up and risk tipping the US economy into recession.

• Besides the global economy is growing in a synchronised way not seen for more than a decade. Increased rates won’t hurt too much. That’s something Bill Dudley highlighted Friday as well noting that in the US financial conditions “have eased rather than tightened” during this Fed rate hike cycle.

• Elsewhere quickly:
• Spain’s apology to Catalonia for the heavy handed approach during and since the referendum quieted markets a little on Friday. We’ll see what happens with regard the Catalonian authorities declaring independence this week. But it’s worth noting the basques might be watching along with some folks in Belgium, Italy, and lets not forget the Scots.
• German industrial order jumped 3.6% in August. Easy to see the ECB’s problem in this synchronised growth cycle. It has to act in manner – as the BoJ has – which signals clearly to markets it is not in lock step with the fed if it wants euro to weaken.
• Apparently the Republicans are already squabbling over the tax cuts. We’ll see how things work out up on the Hill and whether this worry of a derailed tax cut worries traders.