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After surging an impressive 4.5 points in the month prior, the Institute for Supply Management's (ISM) non-manufacturing index improved further in October, rising 0.3 points to 60.1 - the highest reading since 2005. Today's print surprised on the upside with market consensus expecting a decline to 58.5.

Among the main subcomponents, business activity (+0.9 to 62.2) and employment (+0.7 to 57.5) recorded small improvements and extended their streak of monthly gains to three months. Meanwhile, the supplier deliveries index remained unchanged at 58 indicating slower deliveries for a second consecutive month, with industry comments pointing to hurricane-related supply shortages and transportation delays.

New orders pulled back slightly (-0.2) but remained elevated at 62.8, whereas new export orders improved markedly (+4 to 60).

The prices paid sub-index fell 3.6 points, ending four months of gains, leaving the index at 62.7 in October - still one of the best prints since 2012.

Comments from survey contacts continue to point to a positive outlook for fourth-quarter business conditions, with sixteen industries reporting growth in October. Educational Services; and Arts, Entertainment & Recreation were the two industries that recorded a contraction in activity.

Key Implications

Contrary to its manufacturing equivalent which retreated in October, the ISM non-manufacturing index held on to recent gains. Improvements in business activity and employment sub-indices are indeed very encouraging, but perhaps more significant is the support from the supplier deliveries sub-index which remained unchanged after spiking nearly 8 points last month. Given the latter, improved delivery times as per a return to normalcy could lead to some near-term giveback in the headline.

Still, the underlying trend remains an encouraging one, with broad underlying strength among the main sub-components reinforcing the notion that the services sector continues to expand at a solid clip. Rebuilding efforts should provide added support to this trend through the end of the year, boding well for another above-trend GDP print in the fourth quarter.

• European equities trade narrowly mixed with Madrid underperforming due to increasing political tensions. Also US equities trade sideways, near yesterday's closing levels.
• US job creation rebounded in October, but wage growth came in below economists' estimates. Employment rose by a net 261,000 last month, marking the biggest monthly job gains since July 2016. The unemployment rate unexpectedly dropped to 4.1%, but average earnings disappointed as they stabilized instead of increasing 0.2% M/M.
• Growth in the US services sector continued its upward march in October, providing evidence that the world's most important economy remains on course in H2 of 2017, despite the damage caused by the hurricanes. The non-manufacturing ISM came in at a very high 60.1 in October, confounding expectations for a decline to 58.5.
• The UK's vast services sector posted its best rise in activity since April this year, propelled by "resilient client demand" and "improved order books", according to a closely watched poll released on Friday. The headline index rose 2 points to 55.6.
• Ben Broadbent, deputy governor of the BoE sought to reinforce the central bank's message that it had not gone soft on future rate rises on Friday, saying "we will need a couple more interest rate rises".

Rates

US payrolls cannot give bonds a distinct direction.

US October payrolls were a mixed bag, giving investors a too diffuse picture to place new big bets. US Treasuries spiked modestly higher for a short period of time, as lower average earnings were considered as the key lesson out of the report. However, the report was even handed and soon US Treasuries were again at pre-payrolls levels. Later, the Non-manufacturing ISM business confidence surprised, as the headline index even rose to 60.1 instead of falling to 58.5. US Treasuries now tried to go lower, but also the downside was blocked. German Bunds moved sideways today, but with a slightly positive bias. It tried a few times to take out first resistance (162.78/83) and the test isn't over. Anyway the key resistance stands at 163.43.

At the time of writing, the German yield curve has bull flattened softly with yields down between 0.4 bp and 1.4 bps. The US yield curve is narrowly mixed with yields varying between +0.9 bp (2-yr) and -0.3 bp (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany are virtually unchanged with Greece underperforming (+6 bps) on profit taking, following a sharp narrowing in the previous two days (-39 bps).

The headline US payrolls gain of 261K in October fell short of the 313K expected, but an upward revision of 90K in the past two months compensated for the miss. The unemployment rate fell unexpectedly to 4.1%, while a stabilization at 4.2% was expected. However, the unemployment rate beat was (more than) compensated by lower than expected average hourly earnings. These were flat (instead of up 0.2% M/M) following a 0.5% M/M increase in September. The sensitivity of markets for wage growth (inflation) is great as it will play a big role in future Fed policy.

Currencies

Dollar going nowhere on mixed payrolls

Today, the focus was on the US payrolls. However, the report was a mixed bag and failed to give clear guidance for USD trading. A strong US non-manufacturing ISM was slightly supportive for the US currency. EUR/USD trades in the 1.1630 area. USD/JPY again tries to regain the 114 barrier. In a broader perspective, the dollar holds to the tight ranges od previous days.

Overnight, Asian equities showed modest gains. Tech stocks were supported by strong earnings from Apple published after the WS close. USD/JPY was little changed in the 114 area in light trading conditions (Japanese markets were closed). EUR/USD held a tight range in the 1.1650/70 area.

There were no data with market moving potential in Europe. Sentiment on risk was cautiously positive and the dollar gained marginally ground as investors looked forward to the US payrolls report. Interest rate differentials hardly changed. If anything there was a marginal widening in favour the dollar.

The US payrolls were a mixed bag. September job growth (261 000) was below consensus, but including upward revision of the previous two months, the figure was broadly as expected. The unemployment rate declined to the very low level of 4.1%. On the other hand, wage growth disappointed again at 0.0% M/M and 2.4% Y/Y. US interest rates and the dollar dropped temporary upon the disappointing wage data, but the USD and rates decline was reversed soon. Mid-morning in the US, the ISM non-manufacturing unexpectedly rose to a very strong 60.1 from 59.8 (58.5 was expected). The dollar gained a few more ticks. EUR/USD trades currently in the 1.1630 area. USD/JPY is changing hands in the 114.15 area. So, the dollar trades with a marginal gain in a daily perspective, but holds within this week's extremely tight sideways range.

Sterling rebounds slightly on strong services PMI

Yesterday, sterling was hammered as the BoE signaled that two additional rate hikes would be sufficient for inflation to return close to the 2% target at the end of the 2019/20 policy horizon.

Today, the UK services PMI unexpectedly improved from 53.6 to 55.6 (53.3 was expected). The UK composite PMI also improved substantially from 54.1 to 55.8, indicating that UK growth might be decent at the start of the fourth quarter, despite ongoing uncertainty on Brexit. EUR/GBP traded in a narrow range near 0.8925 in the run-up the PMI publication. Initially, the sterling gains were very limited. Investors assumed that even a better-than-expected performance in the key services sector was not enough to change the BoE assessment anytime soon. During the US trading session, sterling gradually captured a better bid. EUR/GBP trades currently in the 0.89 area. Cable spiked temporary higher upon the publication of the US payrolls, but this USD move was soon reversed. The pair trades in the 1.31 area (from 1.3059 at the open this morning).

USDCHF is on a strong rise after breaking through some important levels on a daily chart last week, so we see market turning bullish, currently making a five wave rise. Specifically we see price trading within corrective wave 4), that can cause a strong push higher soon into wave 5.

USDCHF, 4H

Below we see the daily chart of USDCHF, where we see a completed higher degree wave B. The broken trendline can suggest a completed correction and a change in trend, brom bearish to bullish. So more gains may follow in days and weeks to come.

USDCHF, Daily

Volatility increased for the EUR/USD following the publication of surprising macro statistics on the labor market in the US. The unemployment rate decreased to 4.1% in October which is 0.1% less than expected, and the number of non-farm payrolls for October increased by 261,000 against the 312,000 forecasted. September's figure was also revised down from 33,000 to 18,000. The instability in the figures is blamed on the impact of hurricanes Irma and Harvey on economic activity.

Another important factor that will influence the mood of traders is confirmation that Jerome Powell will become the next head of the Fed. He is known for his hawkish views and good relations with the other FOMC members which has reduced fears around the appointment of the next Fed chairman.

The AUD/USD weakened at the beginning of the trading session and bears were stimulated by the disappointing data on retail sales, which have not changed in September despite the forecasted increase of 0.4%. Currently investors are fixing positions due to the fall of the greenback and ahead of the weekend.

The USD/CAD demonstrated a powerful descending impulse after the publication of the labor market statistics in the US and Canada. The USD fall was able to offset the rise in the unemployment rate in Canada by 0.1% to 6.3%. At the same time, employment has grown by 55,600 in October against 15,300 forecasted which is positive for the Canadian dollar.

EUR/USD

The EUR/USD keeps moving within the limits of the local rising channel. In case of maintaining the current positive impulse, the immediate targets will be located at 1.1730 and 1.1825. The closest support levels in case of decline will be in the 1.1600-1.1620 range and breaking through it, may become the trigger for a massive selloff with t potential drops to 1.1550 and 1.1500.

AUD/USD

The AUD/USD is correcting upwards after it was not able to continue falling. Negative dynamics may resume after touching the SMA100 and resistance at 0.7700. In this situation, the first target will be at 0.7635. On the other hand, gaining a foothold above 0.7700 is likely to become the basis for continued price increases up to 0.7740 and 0.7800.

USD/CAD

After a long price consolidation above the 1.2800 level, the quotes were able to break through it and within the current impulse, the USD/CAD may fall to 1.2665 and 1.2550. Potential correction is possible up to 1.2800 and SMA100 on the 15-minute chart. The RSI on the 15-minute chart is in the oversold zone, indicating a possible rebound in the near future.

Job gains put the labor market back on track. Last month we emphasized taking the long view on the labor market, which worked well. Meanwhile, wages were flat but should drift upward again in the coming months.

October Jobs Rebound 261,000: Solid Q4 Economic Growth

Nonfarm payrolls jumped 261,000 in October, with the three-month average at 162,000 jobs. Job gains are consistent with 2.5-3.0 percent economic growth in the fourth quarter, with steady consumer spending, better business investment and a likely FOMC December rate hike.

A rebound in jobs appeared for leisure & hospitality and professional & business services. Meanwhile, there were continued solid gains in education & health (top graph). Government jobs, both federal and state & local, have averaged 12,000 over the past three months. In the goods sector, manufacturing employment posted a strong gain (24,000) and is in line with its average over the past three months, while hiring in construction was up 11,000 jobs for a second straight month.

Wage Growth Stalls in October

After the strongest monthly gain of the expansion, average hourly earnings growth stalled in October. The weak read stemmed in part from the rebound in leisure & hospitality employment, which pays the lowest average wages among major industries. Wages also edged down or slowed across a range of industries, including construction and education & health services. Compared to last October, average hourly earnings are up only 2.4 percent versus a 2.7 percent year-ago pace this time in 2016.

Despite the setback last month, we still expect to see average hourly earnings strengthen in the coming months. In contrast to October, the survey week for November contains the 15th of the month, which tends to produce somewhat stronger monthly gains. The year-over-year reading should also get a boost with a relatively easy base comparison considering monthly earnings growth was flat last November. Beyond the monthly dynamics, wage pressures should continue to build with labor becoming increasingly scarce as indicated by a further drop in unemployment and under-employment.

Unemployment Measures Continue to Tighten

The headline unemployment rate continued to fall, reaching a cycle low of 4.1 percent. The last time the rate was this low was December 2000. Likewise, the U-6 measure of unemployment, which includes marginally attached workers and part time workers who want full time work, fell to 7.9 percent. This is a more comprehensive look of slack in the labor market and is now tied with the previous cycle's low reached in December 2006.

The mean duration of unemployment remains at 26 weeks, which is higher than any level since 1982 and indicates structural issues persist, however. Finally, the labor force participation rate dipped in October to 62.7 percent and remains far below the average level of participation since 1990.

Highlights:

• Payroll employment jumped to 261k from 18K in September as the downward impact from Hurricanes Irma and Harvey reversed.
• The October unemployment rate unexpectedly dropped to 4.1% from September's 4.2% though this did not prevent the annual increase in wages moderating to 2.4% from 2.8% the previous month.

Our Take:

The robust 261k rise in October payroll employment was in part bolstered by the unwinding of the hurricane-related impact in September that limited that month's payroll gain to only 18k (originally reported as down 33k). The average increase between the two months of 140k better reflects the underlying trend over this period. This modified increase does represent a slight easing from the 160k average increase over the previous six months though this is likely more indicative of labour markets approaching capacity, and reduced availability of workers, rather than indicating any weakening in demand. This tightness in labour markets was clearly conveyed by the unemployment unexpectedly dropping to 4.1% from and already low 4.2% in September. This October rate is significantly below the Fed's assumed long–run equilibrium range of 4.5% to 4.8%. However, indications of labour markets operating at, if not beyond, capacity are not putting any material upward impact on wages with the annual increase in October wages moderating to 2.4% from 2.8% in September and the 2.6% that prevailed the previous two months.

Today's employment report makes clear that the weakness in September employment was clearly a temporary weather-related phenomenon. Controlling for this factor, the underlying employment gains likely remain sufficient to keep the above-potential GDP growth evident in the second and third quarters continuing into the fourth quarter. Such is expected to keep the Fed gradually tightening policy. Our forecast assumes that the Fed will raise fed funds another 25 basis points at the next FOMC meeting in December followed by similar-sized hikes every quarter through 2018. The tightening is also consistent with inflation rising through the forecast though not threatening to move beyond the central bank's 2% objective.

Highlights:

• Canada's nominal merchandise trade deficit held steady at an elevated $3.2 billion in September.
• Energy exports rose 4.6% but that was offset by a fourth consecutive monthly drop in non-energy shipments.
• Import growth has also softened but - unlike exports - not enough to retrace earlier strength.
• We continue to expect GDP growth in Canada slowed in Q3 from the outsized pace of growth over the past year but still look for slightly 'above-potential'

Our Take:

Non-energy export volumes declined for a fourth consecutive month with the cumulative drop more than reversing what had been an encouraging increase over the prior three months. Energy shipments provided some offset, rising 4.6% in volume terms. Part of the recent non-energy export weakness has been related to production disruptions in the auto and chemical sectors over the summer. We continue to expect modest growth in exports going forward as global trade flows improve and demand from the U.S. industrial sector strengthens. Nonetheless, it is clearly difficult to argue that there has been much of an acceleration in external demand year to-date in 2017 with annual export growth not tracking significantly different than the 1.0% increase last year.

On the other hand, domestic demand still looks relatively solid. Goods import volumes inched 0.9% lower in Q3 (at an annualized rate) but that retraced little of an 11.2% surge in Q2. Another quarterly increase in equipment imports - notwithstanding softer readings in August and September - mean business investment probably rose again in Q3. Separately released labour market data for October this morning suggests that Canadian businesses are continuing to hire. Clearly growth in the economy has slowed from the outsized - and unsustainable - 3.7% rate mid-2016 to mid-2017. We, nonetheless, still expect overall GDP increased 1.7% in Q3 and look for growth to be sustained at a slightly 'above-potential' 2% rate going forward.

Highlights:

• Employment rose 35k in October, the 11th consecutive monthly increase and the best gain since June.
• Despite solid hiring, the unemployment rate edged up to 6.3% as more people looked for work.
• Wage growth picked up to 2.4% year-over-year from as low as 0.5% in April. October's rise was helped by minimum wage hikes in six provinces, all of which were larger than last year's increases.
• Most of October's job growth reflected a broadly-based increase in goods sector employment, led by the construction industry. The services sector, which has accounted for most of Canada's job growth over the last year, was closer to flat.

Our Take:

Canada's streak of job growth continued unabated in October with employment rising 35k, well in advance of market expectations. And there were plenty of positive takeaways beyond the headline figure. Job gains were concentrated in private sector, full-time work and wage growth (helped by minimum wage hikes in several provinces) continued to trend higher from the lows recorded earlier this year. Youth labour market conditions, which Bank of Canada Governor Poloz put in the spotlight last week, also improved with employment for 15-24 year-olds rising 18k and labour force participation increasing. Other, less positive developments - the unemployment rate ticked higher and average hours worked edged lower - don't take much away from an overall solid labour market report. The unemployment rate is still down 0.7 ppts from a year ago and hours worked are close to their 10-year average.

Today's employment numbers reinforce some of the themes from the Bank of Canada's latest economic outlook. The acceleration in job growth relative to last quarter points to GDP growth returning to an above-trend pace in Q4. Stronger wage growth is also consistent with their expectation that tighter labour market conditions will feed through to wages, albeit with some lag. Finally, an increase in labour force participation might indicate there is a bit more room to run on the employment side than a zero output gap would suggest. All told, we think the BoC will be pleased with today's report but not surprised enough to raise rates again this year after a cautious tone was expressed last week.

Sellers wasted no time in attacking the Dollar on Friday, following news that the United States added another 261,000 jobs to its economy in October.

While the headline Non-Farm Payroll (NFP) data continues to highlight the underlying strength of the U.S. jobs market, it is still below the market expectation of 312,000. Digging deeper into the report, the key culprit behind the Dollar selloff was most likely average monthly earnings, which remained flat in October. With tepid wage growth fueling concerns that inflation could remain depressed for extended periods, the markets may start debating how often the Fed raises rates in 2018. On the bright side, the unemployment rate dropped to a 17-year low at 4.1%, after the hurricane disruptions.
Taking a look at the technical picture, the Dollar Index is under pressure on the daily charts. Prices have descended towards 94.50, with bears currently eyeing 94.00. Sustained weakness below this level puts the current bullish setup at threat, with the next level of interest at 93.50. In an alternative scenario, the Dollar index needs to break above 95.00, for further upside.

Jerome Powell is in the building

Financial markets offered a fairly muted response on Thursday, after President Donald Trump nominated Jerome Powell as the next Fed Chair. Trump's decision is in line with market expectations, and Powell is expected to keep the 'status quo', so the flat reaction short-term is understandable. Although markets expect Powell to take the baton from Yellen by following the current monetary policy course, it should be kept in mind that he is seen as a cautious dove. While it is probably too early to make any assumptions, a dovish Fed head could weigh on the prospects of higher US interest rates in 2018.

Sterling pummeled and thrashed

Sterling was pummeled, pounded and thrashed by sellers on Thursday, after the Bank of England moved forward with a 'dovish rate hike'. This was the first time in over a decade that UK interest rates were increased, and the heavy tone of caution radiating from the meeting raised concerns over the future path of rates in 2018. With Brexit uncertainty and concerns over slowing economic growth weighing heavily on the currency, further downside is on the cards.
The Pound attempted to recover on Friday morning, following reports of Britain's service sector growing at its fastest rate in six months. UK Services PMI jumped 55.6 in October, up from 53.6 in September, which seemed to offer some confidence to bulls. The upside seems limited, especially when considering how Thursday's dovish hike has eroded buying sentiment towards the currency.

From a technical standpoint, Sterling is under pressure on the daily charts. Sustained weakness below 1.3050 may open a path towards 1.3000 and 1.2970, respectively.

A trading week to remember…..

Investors are likely to remember the first trading week of November as one where the Bank of England raised UK interest rates for the first time in over a decade. Reports of Trump unveiling his full tax plan, and the nomination of a new Federal Reserve Chair, has added some spice to proceedings. This, coupled with October's mixed U.S. jobs report, is likely to give investors lots to ponder over the weekend.

USD/CAD - 1.2740

Trend:  Near term up

 
Original strategy       :

Bought at 1.2755, Target: 1.2955, Stop: 1.2695

Position: - Long at 1.2735

Target:  - 1.2955

Stop: - 1.2695

 
New strategy             :

Exit long entered at 1.2705

Position: - Long at 1.2755

Target:  -

Stop:-

Current selloff after meeting renewed selling interest at 1.2836 suggests a temporary top has been formed at 1.2917 last week and downside risk remains for this retreat to bring retracement of recent rise, hence weakness to 1.2700-05 cannot be ruled out, however, downside would be limited to support at 1.2636 and bring rebound later. Only a drop below 1.2636 would signal recent rise has ended at 1.2917, bring further fall to 1.2600 and later towards 1.2550-60.

In view of this, would be prudent to exit long entered at 1.2755 and stand aside for now.above 1.2800 would bring test of said resistance at 1.2836 but a sustained breach above there is needed to revive bullishness and signal the pullback from 1.2917 has ended instead,bring further gain to 1.285-80, then later towards said resistance at 1.2917. Having said that, as we are still treating this rebound from 1.2061 as wave iv, reckon 1.2975-80 (61.8% Fibonacci retracement of wave iii) would limit upside and 1.3000 should hold, bring selloff later in wave v. We are keeping our count that wave v as well as wave (C) ended at 1.3794 and impulsive wave (i ii, i ii) is now unfolding with minor wave iii ended at 1.2414, followed by wave iv correction ended at 1.2778, wave v has reached our indicated downside target at 1.2100 and may extend to 1.2000.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.