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Yesterday’s JOLTS data indicated further cooling in the jobs market, and, based on Christopher Waller’s hints, we should see a soft ADP report today. We aren’t convinced markets are ready to jump aggressively into another round of dovish repricing just yet, but the dollar should already be weaker based on current short-term swap rate differentials.

USD: ADP more important than usual
 

We noted yesterday that the slump in long-dated global bonds was unlikely to sustain dollar strength. That’s proven true – the dollar has given back some gains, and focus has shifted back to the data.

Yesterday’s US JOLTS figures confirmed the labour market is loosening. While job openings fell more than expected to 7.2 million, it’s the uptick in layoffs to 1.8 million that’s more concerning. Meanwhile, a low quit rate continues to signal wage moderation.

Expect no less interest in ADP payroll figures today, for two reasons. First, after official employment revisions, it appears that ADP data did have some decent predictive power for payrolls. Second, the Fed’s hawkish dissenter (and Chair front-runner) Christopher Waller said the weekly reports received from ADP showed continued deterioration. Consensus is for a slowdown from 104k to 68k today.

There is a risk that if ADP data points down, and payrolls surprise on the upside, markets might raise some doubts on the latter. The key question is whether the markets are ready to take rate expectations much lower. We acknowledge that the bar may be a bit higher for another major dovish repricing before the CPI data (11 September), but the dollar appears expensive relative to its short-term rates, and we believe it has more room to fall into tomorrow’s jobs report.

Francesco Pesole

EUR: Upside risks persist
 

We remain of the view that EUR/USD is set for a return above 1.170. As discussed above, markets might not go too aggressive on a Fed dovish repricing (unless US jobs figures are particularly bad), but there is already enough in short-term rate differentials to justify a higher EUR/USD.

Our economics team has published a preview of next week’s ECB meeting (link): we expect a hold, in line with consensus and pricing, but still think the chances of another rate cut later this year are underestimated by markets. As our Fed call is also more dovish than markets – and given the much larger room for dovish rerating in the USD OIS curve relative to the EUR one – our call remains moderately bullish on EUR/USD for the coming months.

Francesco Pesole

GBP: Calm restored, but pound remains unattractive
 

The pound has rebounded in line with our call as gilts bounced back after Tuesday’s headline-grabbing slump, which was entirely in line with global bond moves.

Yesterday, Bank of England Governor Andrew Bailey confirmed the more cautious MPC stance on further rate cuts. With the UK Autumn Budget event now set for 26 November, markets have trimmed down chances of a cut at the 6 November meeting even further to 5bp, but have slightly increased those for a December cut (13bp). That follows the rationale that the announcement of growth and inflation-dampening tax rises can tilt the balance back to the dovish side for the MPC.

We still believe the BoE will cut before year-end, and while we thought yesterday’s GBP drop was overdone, the coming months will likely see multiple headlines and speculation about the content of the Budget, with elevated risks of adverse spillover into gilts and sterling. As markets may not feel comfortable completely wiping out December cut bets due to the Budget impact itself, the pound may not count on much more support from front-end rates.

Even if that may not play out in the next few days just yet, EUR/GBP remains more likely to trade 0.870 or above rather than below 0.860 into the November Budget event.

Francesco Pesole

CEE: Hawks dominate in the region
 

August flash inflation will be published in the Czech Republic. Our economists expect a drop from 2.7% to 2.5%, in line with market expectations and below the Czech National Bank's forecast of 2.7%. Core inflation is also expected to fall slightly from 2.7% to 2.6%. However, food inflation remains highly volatile and unclear for now. Yesterday's wages figures surprised significantly upwards, supporting the CNB's hawkish case. August should be the lowest month of the year in terms of inflation, and in the coming months, we should see a return closer to 3.0%. Therefore, we remain hawkish and bullish on the CZK. EUR/CZK returned close to 24.400 yesterday. Although rates still do not point to these levels and it may again be only temporary, we believe the direction is correct.

The National Bank of Poland cut rates by 25bp to 4.75% as expected yesterday, and the statement was cautious, also in line with our expectations. This suggests that today's press conference will likely be hawkish, with an emphasis on fiscal policy and wages. Therefore, we like payers at the short end of the curve and remain bullish on the PLN. EUR/PLN touched 4.250, a target we mentioned here previously, but we still believe there is room to go lower if hawkish expectations are met.

Frantisek Taborsky

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