European markets had their best one-day session in 3 weeks, with the DAX closing at a 2 week high, helped by a combination of some solid earnings reports and falling yields on growing optimism that central banks have peaked after the Bank of England followed the Fed in keeping rates at current levels.
US markets had a similarly strong session, rising for the 4th day in a row, with the S&P500 rising to a 2-week high, while US 10 and 30 year yields have fallen more than 25 basis points in the last 2 days, reinforcing the idea that the rate hike narrative of the last 18 months is now in the rear view mirror.
Of course, this narrative still needs to be supported by the underlying economic data, which in the case of the US is likely to be subject to two-way risks given the continued resilience of the US labor market.
Today’s Non-Farm Payrolls report for October will be the first key test of this narrative following the Federal Reserve’s decision on Wednesday to pause for a second consecutive meeting, with the Goldilocks scenario for markets likely to be a soft or neutral report.
After such a strong US close, European markets look set to open higher as we look ahead to this afternoon’s US jobs report.
Before that, we get the latest PMI snapshot of the UK economy’s services sector ahead of the Q3 GDP numbers due next week. Recent data has shown that the UK economy is slowing significantly compared to the first half of the year, and with the manufacturing sector already in contraction, the services sector is now starting to slow down as well, slipping slightly into contraction over the last 3 months, we can expect further stagnation around 49.2.
After the release of these numbers, attention will shift to the US employment report.
Weekly jobless claims fell below 200k earlier this month for the first time since January in a sign that the US economy remains reasonably resilient, and although they’ve ticked up to 217k since then there’s been little sign of a slowdown.
In September we saw another bumper payroll report with another 336k jobs added, while August was revised up to 227k, which pushed US long term yields to new 16 year highs on the day, although we’ve since come back sharply on the belief that the Federal Reserve is probably done on the rate hike front.
Wage growth was slightly weaker than expected at 4.2%. Another notable factoid was a big jump in part-time positions, which rose by 151k and may also explain why wage growth showed little sign of racing higher. The unemployment rate held steady at 3.8%.
This week’s ADP payrolls report for October was another weak one, coming in at 113k, only a modest improvement from the 89k in September, however there has been little to no correlation between the two reports for months now, while vacancies in the US economy have remained high, suggesting little sign that the US economy is starting to slow significantly.
One thing that has been notable this year is how every single non-farm payroll report has come in above expectations, and by quite a bit. Will today’s numbers be any different? it is worth noting that there is room for that as the participation rate has been rising, it was at 62.4% at the beginning of the year and is now at 62.8%, still 0.5% below its pre-pandemic level.
Expectations are for today’s October payrolls to come in at 185k, which has been the estimate of choice for the last 3 months.
Most of the new jobs added in recent months have been in the service sector, and today’s ISM services data may provide further insight into this after the payroll numbers are released.
ISM services employment was at 53.4 in September and is expected to rise to 53.5, while prices paid is expected to slow to 56.6 from 58.9. This is where the US labor market is most resilient and will need to remain so in the run up to Christmas.
Amazon has already announced that it will be hiring up to 250 seasonal workers for the holiday season. Will it be alone in hiring extra workers when retailers like Target are warning that US shoppers are slowing their spending plans?
EUR/USD – Pushed to the upper end of its recent range and this week’s highs of 1.0675. We remain range bound between the 1.0700 area and the 50-day SMA. A break below 1.0520 targets the 1.0450 level.
GBP/USD – Pushed above the 1.2200 level yesterday, but has failed to consolidate the move so far. Major support remains at the October lows just above 1.2030. Below 1.2000 targets 1.1800 area. Resistance at 1.2300.
EUR/GBP – Finding support in the 0.8680 area for now, with a break targeting the 0.8620 area. Resistance at the recent highs at 0.8740.
USD/JPY – Slipped back to the 149.80 area yesterday, we still have resistance just below last year’s highs at 151.95. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.
FTSE100 is expected to open 33 points higher at 7,479.
DAX is expected to open 79 points higher at 15,222.
CAC40 is expected to open 36 points higher at 7,096.