HomeContributorsFundamental AnalysisOctober Fed Cut Looks Increasingly Irrevocable

October Fed Cut Looks Increasingly Irrevocable

Market movers today

It is the day of the jobs report in the US. We expect non-farm payrolls to have grown by 100,000 in September, which is below the Bloomberg consensus of 140,000. While the non-farm figure tends to be volatile, the employment indices in the Markit PMI and the ISM reports do not look encouraging (and actually signal that jobs growth was even lower than our expectation of 100,000). A weak jobs report will likely add fuel to the repricing of the Fed seen this week.

Today also provides the opportunity to listen to Fed comments from Rosengren, Botstic and Powell, who are scheduled to speak. Powell is only making opening remarks at a “Fed Listen” event though, so we would not get our hopes up too high that he will give out new monetary-policy signals.

Selected market news

In another sign that the global economic slowdown is making its mark on the US economy, yesterday it became blindingly obvious that the service sector cannot go unabated amid a widespread manufacturing slump. European PMIs came out on the soft side throughout the day, but it was notably a very weak US non-manufacturing ISM that made markets react more profoundly. The headline dropped to 52.6 (from 56.4 last), a 3Y low, as not least, new orders and the employment sub-index witnessed big declines. Taken together, this week’s ISM reports now signals US growth of a mere 1% q/q (ar). This adds further support to our call for another Fed cut later this month, even if the Fed’s Clarida yesterday reiterated that it is one meeting at a time and that the US economy is in a ‘good place’.

Equities went higher on Thursday, with the S&P up 0.8% on the day after the ISM release as expectations of a Fed cut in October were raised further to now stand above 85%, compared with some 40% at the start of the week. Thus, even if we are right in our below-consensus call on non-farm payrolls today, it is probably limited how much more can be priced near term, and attention will centre on whether Fed members are willing to commit to a series of cuts (mind the members speaking today). EUR/USD failed to break the 1.10 mark this time around but should be ripe if today’s jobs report is weak. USD/JPY fell below 107 as US 10Y yields went under 1.54% – note that there is now some 10bp to go before reaching the year-lows of early September. Short-end Treasury yields dropped around 9bp and the curve bull-steepened. Meanwhile, at this stage, the market seems little affected by the rolling impeachment process against the US president.

After the US jobs figures today, markets will be centring attention on next week’s high-level US-China trade negotiations, where we see 60% chance of an interim deal. After the US got the WTO’s blessings to impose tariffs on, among other things, aircraft from Europe, the European Commission trade spokesman, Rosario, said yesterday that the EU will not immediately retaliate and is still looking to negotiate a solution. By mid-November, the US is also due to decide whether to impose tariffs on European auto imports.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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