Image Source: Pixabay
 

Overview: The first of what promises to be two tumultuous weeks is winding down. The US jobs data is the last big event. It is widely recognized that it will be skewed to the downside because of hurricanes and some mostly temporary factors. Anticipating the market’s reaction is also complicated by the weekend, and reports that Iran may strike back at Israel (through bases in Iraq?), and next Tuesday's US election, and five G10 central bank meetings next week. The US dollar is mostly firmer but consolidating against the G10 currencies. Emerging market currencies are also mostly weaker, though the Mexican peso is up slightly. 

Asia Pacific equities tumbled. The Hang Seng and mainland shares that trade there were exceptions. Europe's Stoxx 600 is up a little more than 0.5% after dropping 1.2% yesterday. US index futures point to a higher opening after yesterday's losses. UK Gilt yields continue to rise since the budget announcement. European 10-year yields are up mostly 2-3 basis points, while the Gilt yield is up four. The 10-year US Treasury yield was essentially flat coming into today and it is up a basis point to 4.30%. Gold is stabilizing after falling nearly 1.6% yesterday, the biggest decline in three months, in what appeared to be almost a margin call, given the drop in equities. Oil continues to recover. December WTI gapped lower on Monday on signals that Israel's strike on Iran would not spur a response. However, prices have risen this week amid reports that Iran will strike back. December WTI is up nearly 2.8% today and back above $71. 
 

Asia Pacific

Japan's final October manufacturing was 49.2 up from 49.0 initial estimate. It is the lowest since the end of the first quarter. For its part, the BOJ is focused prices, and Governor Ueda's comments underscored the connection with the exchange rate. The swaps market is now discounting about 8.5 bp of tightening, which may be a little more than a 50% chance of a 15 bp move. Less than six basis points were priced in at the end of last week. Australia's final manufacturing PMI stands at 47.3, up from an initial estimate of 46.6, and 46.7 in September. Consumer demand is softening. After the disappointing September retail sales reported yesterday, Australia reported that the broader category of household spending fell by 0.1% after the August series was revised to a 0.2% gain from a flat preliminary estimate. The RBA meets next week and there is practically no chance it cut rates. In fact, the market does not have a cut fully discounted until Q2 25. Finally, China's Caixin manufacturing PMI ticked up and like the official one, moved above 50 (50.3 vs. 49.3 in September). Expectations are building for a fiscal package to be confirmed by the National People's Congress next week.

The dollar recorded the low for the week yesterday as Europe was opening yesterday, a little below JPY152.00. It recovered to poke above JPY153.00 in early North American activity before pushing back to almost JPY152.00, as sharp falls in the equity market brought back a bid for US Treasuries. The dollar found support today near JPY151.80 in the local session is and has recovered to the JPY152.80 area. The Australian dollar traded inside Wednesday's range yesterday as it extended the consolidative phase that began on Tuesday. It continues in the run-up to the US jobs report as it chops between $0.6555 and $0.6585. The Aussie settled last week slightly above $0.6600 and the low this week was near $0.6535. The greenback slipped to a marginal new six-day low around CNH7.1180 today before recovering to CNH7.1340. Wednesday's high (~CNH7.1670) was two-month high. The PBOC set the dollar's reference rate at CNY7.1135 (CNY7.1250 yesterday). 
 

Europe

Europe's economic calendar is light today, providing a good opportunity to review two important developments. The first is the outlook for the ECB. At the end of last week, the market was discounting around a 40% chance of a half-point cut in December. However, the stronger than expected Q3 GDP, and Germany apparently escaping the second consecutive quarterly decline, has seen the market reduce the odds by about half. At that start of this week, the swaps market had nearly 125 bp of easing through the middle of next year priced in, and now, 111 bp. The US two-year premium over Germany narrowed by around an eight basis points this week, helping support the euro, though before the US jobs data. The second development is the markets response to the UK's budget. The most telling response, arguably, is the jump in Gilt yields. Yields were rising as they were throughout Europe and the US starting in late September. The 10-year Gilt yield rose by around 25 bp in the first half of October. Position squaring ahead of the budget saw the yield pull back but only to reverse higher. It continued to move higher and has risen about 25 bp this week to approach 4.50%, for the first time since last November. The UK two-year premium over the US jumped to over 25 bp this week from six basis points at the end of last week. The swaps market is still confident of a quarter-point cut by the BOE next week but is pricing in a slow pace going forward. Yet, sterling is struggling. Still, thinking about next week; Sweden's Riksbank looks set to cut 50 bp, while Norway's Norges Bank stands pat. The Norwegian central bank has not been rewarded for its hawkishness as the krone has fallen more than 7.5% this year, second only to the yen among the G10 currencies. 

The euro approached $1.0890 in the North American morning yesterday, an 11-session high. It held below $1.09 where 1.6 bln euros in options expired yesterday, and options for another billion euros expire there today. The euro briefly traded above the 20-day moving average (~$1.0875) for the first time since October 1 but failed to sustain the upward momentum. For the better part of the last 48 hours, the euro has been mostly confined to a $1.0840-90 range. Sterling reached $1.3040 on Wednesday before the budget and recorded a low near $1.2845 yesterday. The larger-than-expected borrowing needs contained in the budget roiled the Gilt market, but the higher interest rates failed to support sterling. Sterling is trading quietly in a narrow range of about $1.2885-$1.2920 today. 
 

America

The September jobs report seemed to have exaggerated the strength of the US labor market while today's report on the October labor market will exaggerate its weakness. The median forecast in Bloomberg's survey has fallen to nearly 100k. The private sector is seen gaining 70k jobs. No doubt seasonal-adjusted ADP estimate of 233k while get the chins wagging about a stronger whisper number. That said, recall that the last time the ADP estimate was higher was in July 2023, when it estimated 307k private sector jobs were created. The BLS figures showed that private payrolls expanded by only 148k. Given the weather and temporary distortions, a headline shock could see the market initially respond one way only to quickly reverse. It would not be the first time. The US also sees its final October manufacturing PMI and the manufacturing ISM. The former has been above 50 for four months through October. The ISM has been below 50, expect this part March since October 2022. Canada sees its October manufacturing PMI. It was (slightly) above 50 in September for the first time since April 2023. The swaps market is pricing in a little more than a 50% chance of another half-point cut in December, after the Bank of Canada has slashed its target rate by 125 bp this year in four steps. Mexico reports unemployment, worker remittances, and IMEF surveys. The peso is not always sensitive to these reports. The US jobs data and the broad direction of the dollar are more important. Next week, Brazil's central bank is widely expected to continue to tightening phase with 50 bp rate hike, which will bring the Selic to 11.25%. The first move delivered a quarter-point hike in September. The Brazilian real drew little comfort. It fell by about 5.6% against the dollar in October, the second worst in the region behind the Chilean peso's 6.6% loss.

The US dollar came within 1/100 of a Canadian dollar of the early August high for the year slightly above CAD1.3945 yesterday. Risk-off impulses, generated from the sharp decline in equities took a toll. Above this area, and there is little to deter a run at CAD1.40. There are about $635 mln options that expire there on Monday. In the past two sessions, US dollar pullbacks below CAD1.39 have been bought. The Mexican peso looked poor on Wednesday as it was sold to a new two-year low. However, it came back yesterday, despite the risk-off mood. The greenback slipped back below MXN20.00 having reached nearly MXN20.2280 on Thursday. Although it did not close below MXN20.00 yesterday, selling pressure today has pushed it to a four-day low near MXN19.95. Among Latam currencies, the Mexican peso was the only one that strengthened yesterday. The peso's gains seemed to be a function of short covering, which may be part of the position adjustment ahead of the US election. 

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