European markets took a more negative tone yesterday after Wednesday’s solid session that saw the DAX hit new record highs. This was due to weakness in Asian markets, triggered by weak Chinese trade data and Moody’s downgrade of China’s credit outlook, which weighed on overall risk sentiment.
US markets shrugged off this negativity, with a surge in the Nasdaq 100 pulling the rest of the market higher as optimism over AI helped lift almost all boats, while a sharp drop in continuing jobless claims helped paint a picture of a resilient US labor market despite this week’s lackluster ADP jobs report.
There’s no question that job growth in the US is slowing, but anyone who thinks that the slowdown in job growth is anything other than a natural progression of a tightening labor market, rather than a precursor to a hard landing, isn’t getting any encouragement for the latter view.
Last month’s October jobs report was the first this year where the headline number came in below market expectations, but not by enough to raise concerns about the resilience of the US economy and labor market.
In contrast to September, when the US economy added 297,000 jobs, job growth slowed to 150,000 in October, while the unemployment rate ticked up to 3.9%, a sign that the US economy is now starting to slow in a way that will please the Federal Reserve.
Combined with a similarly weak ADP report in the same week, where job growth slowed to 106k, and a softer ISM services survey, yields have fallen significantly from their October highs, as well as below where they were a month ago, in a sign that the market believes that rate hikes are done and has now moved on to when to expect rate cuts.
This week’s ISM and ADP numbers have done little to change that narrative and are already presenting a challenge to the Federal Reserve and the FOMC.
This is the next challenge for the Fed, which will want to continue to push the “higher for longer” mantra.
We also saw that JOLTS job openings fell to 8.7 million in October from 9.35 million, while weekly jobless claims are still trending in the low 200k’s which means that the Fed still has plenty of room to push back on the current market pricing of rate cuts when they meet next week.
Expectations are for 183k jobs to be added in November; however, it should also be remembered that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and Christmas which could see the numbers come in higher.
Whatever number we get, it would be a big surprise to see any signs of a crack in the US labor market this side of 2024, with the labor force participation rate expected to remain unchanged at 62.7% and the unemployment rate at 3.9%.
The USD/JPY continues to be a big mover after yesterday’s plunge, with the Yen surging after Bank of Japan Governor Kazuo Ueda hinted that a policy pivot may be on the horizon, as traders speculate that the time may be near when the BoJ will move to take interest rates out of negative territory. This surge in the yen has led to a sharp drop in the Nikkei 225 in yet another negative week for the Japanese benchmark. It was a more positive week for other markets in Asia, with the ASX200 and KOSPI finishing higher, while the Hang Seng also underperformed.
While the Yen was a big winner yesterday, this potential change in policy seems to have caught many off guard, with further Yen strength possible on a move below 140.00. With the Bank of Japan being so far behind the curve when it comes to raising interest rates, it seems somewhat bizarre that we could see a situation where the Japanese central bank is starting to normalize policy just as the likes of the ECB and the Federal Reserve have already peaked and are on the cusp of starting a cycle of rate cuts next year.
Today’s German inflation numbers for November are expected to be confirmed at 2.3%, with a month-over-month decline of -0.7%.
EUR/USD – Found a bit of a short term base at 1.0750, moving back towards the 200-day SMA, but needs to close back above the 1.0830 area to consider a retest of the 1.0940 area. Support at 1.0750 and below at 1.0670.
GBP/USD – Dropped below the 1.2570 area to 1.2544 before recovering, but needs to get back above 1.2630 to retest the 1.2740 area. Major support on the downside is at 1.2460 and the 200-day SMA.
EUR/GBP – Currently trading between 0.8590 and this week’s lows at 0.8550. While below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520 and possibly further towards the August lows at 0.8490.
USD/JPY – Dropped like a stone yesterday, sliding below the 146.20 area and briefly below the 200-day SMA at 142.10 to 141.60 before recovering. Today we’ve seen another sharp drop and bounce off the 200-day SMA. We need to see a daily close below the 200-day SMA to open a test of 140.00 and then on towards 135.00. Resistance back at 146.20.
FTSE100 is expected to open 20 points higher at 7,533.
DAX is expected to open 44 points higher at 16,673.
CAC40 is expected to open 17 points higher at 7,445.