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Market Movers ahead

• In the US, the most important data release next week will be CPI and CPI core figures for September, which we estimate will have increased.
• The coming week brings several speeches by FOMC members and the minutes from the September FOMC meeting.
• In the euro area, we look for another rise in Sentix investor confidence in October.
• China may release the Total Social Finance credit data over the next week, which will give insights into whether the crackdown on shadow finance is continuing.
• In the Scandinavian countries, inflation numbers for September are due out.

Global macro and market themes

• The world economy is growing solidly thanks to rising business and consumer confidence.
• Economic momentum should continue in 2018, although policy tightening is likely to moderate growth in some countries.
• Inflation pressures are set to remain relatively muted, allowing a gradual central bank policy normalisation.
• The scenario is bullish for global equities and moderately bearish for bonds.
• A Chinese debt meltdown or a North Korean war remain the low probability-high impact events of 2018.

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Good day traders! Today's focus is on EURJPY.

EURJPY found a support slightly above Sep 26 low, so we see pair still making a corrective move; possibly a flat with wave C up in play that can retest 133.30 next week then drop, while market stays below 134.45.

EURJPY, 1H

• European equities record losses of around 0.5%. US equities opened around 0.2% lower after mixed payrolls which raised the odds of another rate hike this year.
• US payrolls were mixed. The number of people employed declined by 33 000 in September (vs + 80 000 consensus) and the previous 2 months' figures faced a combined 38 000 downward revision. Weather conditions played a significant role. The unemployment rate unexpectedly dropped to 4.2% though, the lowest level since early 2001. On top, average hourly earnings rose by 0.5% M/M and 2.9% Y/Y, matching the fastest pace since 2009 and beating consensus by a wide margin.
• Canada's labor market showed more signs of tightening in September, with the 10th straight month of employment gains and the strongest wage increases in more than a year. Net change in employment increased by 10k, close to consensus (12k), but details showed a huge switch from part time jobs to full time jobs.
• Spain apologised for a violent police crackdown on Catalonia's independence referendum, in a conciliatory gesture as both sides looked for a way out of the nation's worst political crisis since it became a democracy four decades ago.
• British PM May said she would stay on as leader to provide stability after a former chairman of her Conservative Party said he had garnered the support of 30 lawmakers who wanted her to quit.

Rates

US 10-yr yield tests key resistance at 2.4%

Global core bonds lost ground today in the run-up and after a mixed US payrolls report. Strong average hourly earnings stood out. US yields tested key resistance after the release, but breaks didn't occur yet apart from at the 2-yr tenor. At the time of writing, US yields rise by 2.5 bps (2-yr) to 4 bps (5-yr). German yields trade 0.8 bps (2-yr) to 3.3 bps (10-y) higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany barely changed.

The Bund opened little changed, but came under pressure mid-morning and dropped about 40 ticks before a bottom was found and sideways trading kicked in. US Treasuries copied the Bund's move. Various factors may have been in play. Some positioning ahead of the US payrolls, very strong German order intake (which was published at the opening of the session though) and technical factors. The decline accelerated when yesterday's low was broken. During US dealings, focus turned to the payrolls report. The outcome was mixed. Net job growth hugely disappointed (-33k), but was distorted by hurricanes Harvey and Irma. Taking into account the previous two months' revisions, payrolls missed consensus by 151k which is gigantic. The unemployment rate dropped to the lowest level since 2001 though and was accompanied by a rise in the labor force participation rate (to 63.1%). Average hourly earnings rose more than forecast (0.5% m/m & 2.9% y/y vs 0.3% m/m & 2.6% y/y consensus) and matched the fastest pace since 2009. Investors focused on the inflation component of the report, pulling US Treasuries lower. The move remained all in all modest with US yields rapidly running into key resistance levels. The US 2-yr yield managed to take out the 1.5% hurdle, but the 5-yr yield (1.97%) and 10-yr yield (2.4%) have more difficulties. The market implied probability of a December rate hike increased further to 80%.

Currencies

USD gains modestly on distorted payrolls

The US payrolls were the focus for USD trading today. As expected, the report was distorted by the impact of the hurricanes. However, the decline of the unemployment rate (to 4.2%) and a strong rise in average hourly earnings suggested a further improvement in labour market conditions. US yields and the dollar rose slightly after the report. EUR/USD trades in the 1.17 area. USD/JPY is changing hands around 113.25.

Overnight, Asian markets profited from positive spill-over effects from WS's record race. Even so, the gains in USD/JPY remained modest. The pair continued to struggle to overcome the 113.00/26 resistance. Uncertainty on the outcome of the Japanese parliamentary elections might play a role. Overall USD strength finally pushed EUR/USD for a test of the recent lows below 1.17. The decline of the Aussie dollar accelerated after RBA-member Harper indicated that the economy isn't out of the woods and as he suggested that an additional rate cut isn't ruled out.

The dollar tried to extend its uptrend early in European dealings, but there was no strong enough driver just hours before the he key US payrolls report. Very strong German factory orders (3.6% M/M and 7.8% Y/Y) maybe also prevented a further decline of EUR/USD. The pair settled in a tight range close to 1.17. USD/JPY held near 113 as the equity rally stalled.

US payrolls painted quite a diffuse picture. There was a net decline in the number of people employed of 33K. The report was subject to major disruptions due to the hurricanes Harvey and Irma. At the same time, the unemployment rate declined to 4.2% from 4.4%, the lowest since 2001. Average hourly earnings rose a strong 0.5% M/M and 2.9% Y/Y (only 0.3% M/M and 2.6% Y/Y was expected). Bonds and the dollar reacted in the first place to the decline in the unemployment rate and rise in wages. US yields increased and interest rate differentials with the euro and the yen rose modestly. EUR/USD dropped to the 1.1670 area, but the dollar couldn't hold on to the initial gains. EUR/USD trades currently again in the 1.1190 area. USD/JPY jumped to the 113.40 area. This cross rate is a bit more resilient (currently 113.30 area) even as equities show modest losses after the payrolls. Conclusion: USD yields and the dollar rise marginally after strong US wage data, but the disruptions due to the hurricanes prevent investors to play the USD reflation trade in a more aggressive way.

Political uncertainty keeps sterling the defensive

Sterling remained in the defensive today even as there was no high profile negative news. Lingering uncertainty on the political fate of PM May and the lasting stalemate in the Brexit negotiations continue to haunt sterling. The Halifax House prices rose (0.8% M/M and 4.0%Y/Y) were higher than expected but that wasn't the markets' focus. EUR/GBP initially held a tight in the 0.8930/55 area. The UK currency lost further ground in the run-up to the US trading session. Decent eco data probably won't help as long as there is no clarity on UK politics. The technical picture of sterling is deteriorating, both against the euro and the dollar. US payrolls caused temporary gyrations in cable and EUR/GBP, but had no substantial impact. EUR/GBP trades in the 0.8965 area. Cable lost a few more ticks in line with the overall USD up-tick. The pair trades in the 1.3050 area, extending the established decline. Sterling might be vulnerable to additional losses if risk sentiment deteriorates.

Quickly moving beyond the temporary distortions, the outlook for jobs/personal income/consumer spending remains optimistic. The Fed still has the green light in December, even as jobs fell 33,000 in September.

September Jobs Down 33,000: Hurricane Whirlwinds

Nonfarm payrolls fell 33,000 in September, with the three month average slipping to 148,000 jobs. Despite the weakness, job gains in recent months and uptrend in wages are good for consumer incomes and consistent with 2.5 percent economic growth in the third quarter, and Fed policy as currently projected for a December rate hike.

Over time hiring in the services sector remains solid (top graph). In the goods sector, manufacturing and construction employment have continued to show gains over the past four years in contrast to the volatility witnessed, especially in manufacturing jobs, in the prior two expansions. Also reassuring has been the strength in the employment components of both the ISM manufacturing and non-manufacturing surveys this year.

Wage Growth: Real Wage Gains Over the Past Two Years?

Despite the focus on nominal wage gains, the real story for the American household is that real wages continue to rise and thereby boost household real incomes and consumer spending.

Nominal average hourly earnings rose 0.5 percent in September and are up 2.9 percent over the year. We interpret this gain as a shift in the mix of jobs where lower wage leisure and hospitality workers fell 111,000 in September. While job growth remains strong, the gradual rise in earnings over the past six months signals higher incomes but also pressure on profits as firms have modest top-line pricing power (especially in the goods sector).

Longer term, the modest inflation readings and weak productivity numbers have limited the gains in nominal wage growth (middle graph). Lackluster productivity growth in the current cycle has weighed on wage growth and will likely continue to hamper wage appreciation. Moreover, inflation has been persistently below the FOMC's target of two percent and has struggled to sustain upward momentum. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.

Structural Problems Persist: Drag on Growth

For any given unemployment rate (labor supply), the vacancy rate (job openings) remains wider than in the previous expansion (bottom graph), however the slack is gradually tightening. This Beveridge Curve signals a structural weakness in the labor market which is confirmed by several labor market survey indicators. Compared to a year ago, the unemployment rate for those without a high school education and with a high school diploma remains higher than the unemployment rate for those with some college.

The mean duration of unemployment rate remains at 24.4 weeks which is higher than any level since 1982. Finally, the prime age labor force participation rate has risen over the last year but remains far below the level of participation since 1990.

Highlights:

• Payroll employment in September dropped 33k following the 169k increase in August though greater strength in the household employment survey contributed to the unemployment rate dropping to 4.2%.
• The annual increase in wages jumped to 2.9% though it may have been distorted by the hurricanes.

Our Take:

The impact of Hurricanes Irma and Harvey was clearly evident in today's report as the monthly tally for September payrolls was much weaker than expected declining 33k following the reported 169k gain in August. The BLS, which compiles the data acknowledged that the two hurricanes had a clear downward impact on the job count though was not able to provide a precise estimate of the hit. However, the BLS did point out that food services component sank 105k in September compared to a trend gain of 24k over the prior twelve months. The BLS noted that this sector is particularly vulnerable to weather-related disturbances as "a large majority of [these] workers are not paid when they are absent from work." This suggests that this single component likely biased down September payrolls by almost 130k and indicative that underlying payroll gains remain solidly positive in the month. Underlying strength in September labour markets was also conveyed by the unemployment rate dropping more than expected to 4.2% from 4.4% in August. The unemployment rate is based on the separate household survey where individuals unable to get to work due to adverse weather are still counted as 'employed.'

The continued underlying strength in labour markets augurs well for overall GDP growth to continue to increase at an above-potential rate. This pace of activity will likely be abetted by the repair and rebuilding work that will ensue in the wake of the damage to from both hurricanes. With the 4.2% unemployment rate reported today indicative of labour markets operating at capacity, the Fed will likely see the need to continue to tighten policy. Thus today's report reinforces our view that the fed funds range will be hiked 25 basis points in December with four similar-sized increases through 2018.

Highlights:

• Employment rose 10k in September as massive swings in full-time (+112k) and part-time (-102k) largely offset one another.
• The unemployment rate held steady at 6.2%. Aside from a two-year period prior to the 2008-09 recession, when the economy was running beyond full capacity, unemployment hasn't been this low in decades.
• Wage growth picked up to 2.2%, the highest pace in more than a year, from a low of 0.5% in April. September's increase was in goods-producing jobs, led by an gain in construction sector employment.
• Services employment was flat as a jump in education services, likely reflecting shifting hiring patterns for teachers, was offset by a pullback in culture and recreation employment.
• A more moderate pace of job growth in Q3 - with average monthly gains of 14k compared with 31k over the first half of the year - is consistent with our forecast that GDP growth shifted down to a still above trend 2.5% annualized rate in the quarter.

Our Take:

Canada posted a tenth consecutive job gain in September, extending the best streak in nearly a decade. But the bigger story in today's employment report is that wages are finally starting to pick up after a period of puzzlingly slow growth. Average hourly wages were up 2.2% from a year ago, largely due to acceleration in the last few months. It appears tight labour market conditions, including a near-decade-low unemployment rate and limited 'hidden' slack, are finally having an effect. Faster wage growth, which should eventually feed through to higher prices, supports the Bank of Canada's expectation that inflation will return to its 2% target over the next year. After a more dovish speech by Governor Poloz last week trimmed the odds of another rate hike this year, we think today's report supports our forecast that the overnight rate will be raised once more in 2017.

WTI oil holds in red on Friday and returned below $50 handle and also broke back into weekly cloud (cloud top lies at $49.87) with fresh acceleration lower after US jobs data, denting next important support at $49.47 (200SMA). Near-term focus is turning lower after recovery attempts was capped by south-turning 10SMA and fresh acceleration lower posted new 3-week lows. Close below $50 will be seen as negative signal, while weekly close below 200SMA would generate stronger bearish signal. Immediate targets lay at $49.20 (Fibo 50% of $45.57/$52.84 ascend) and $48.98 (rising 55SMA), which guard next pivot at $48.35 (Fibo 61.8%). Broken 20SMA ($50.38) is expected to limit corrective upticks.

Res: 50.00; 50.38; 50.80; 51.02
Sup: 49.39; 49.20; 48.98; 48.35

US NFP showed the negative result for the first time in seven years, with record drop in employment registered in hospitality and leisure sector, as expected.

Fall in payrolls which strongly undershoot already low forecast at 90K and previous month's upward-revised 169K build, is expected to be short-lived, as negative numbers were caused by the weather and most of displaced people would probably return to work.

Unemployment rate fell to 4.2% in September, the lowest since Feb 2001 and the figure was not impacted by hurricanes which hit states of Florida and Texas last month.

Wages growth, which was focused today, surprised at the upside with Average Hourly Earnings showing 0.5% rise in September vs forecast for increase by 0.3% and upwards-revised figure in August to 0.2% from 0.1%.

Increase in wages had the strongest impact on the greenback and offset negative tone from NFP's miss.

The US dollar hit fresh highs against the basket of major currencies shortly after US jobs data release.

USDJPY pair broke above pivotal barrier at 113.25 and hit the highest since July 14 at 113.41.

EURUSD slid to new seven-week low at 1.1669, while the British pound fell to one-month low at 1.3035 and eyes psychological 1.3000 support as political uncertainty in the UK additionally pressures pound.

Spot Gold extended broader weakness and met target at $1263, after US jobs data inflated the greenback and Crude Oil fell on dollar's fresh post US jobs report acceleration higher. WTI oil price fell to the lowest in three weeks at $49.55, while Brent oil fell over $1 after US jobs data.

Non-farm payrolls fell 33k positions in September, due largely to disruptions caused by Hurricanes Harvey and Irma. The Bureau of Labor Statistics (BLS) cited that the Hurricanes reduced payroll employment, but that there was no discernable effect on the unemployment rate, which dipped to a 16-year low of 4.2%.

In the payrolls survey, workers who were not paid for the week of September 12th due to disruptions caused by the Hurricanes, are not counted as employed. However, in the household survey, which produces the unemployment rate, persons with a job are counted as employed even if they miss work for the entire week. The BLS stated that no changes were made to the survey or estimation procedures for the September figures and that collection rates were within normal ranges.

Details of the September payrolls report are less meaningful, but it is worth noting that September was the first negative month since 2010. Job losses were concentrated in services (-49k), but goods sector hiring was also soft (+9k). The largest losses, not surprisingly, were in the leisure and hospitality sector (-111k) likely due to Hurricane Irma hitting Florida, and its outsized tourist sector, in the reference week.

On the household side, labor market signals continued to strengthen. The participation rate and the employment to population ratio both increased. In fact, the employment-to-population ratio rose to a new post-recession high of 63.1%.

A healthy wage gain, was the most encouraging aspect of the report. Average hourly earnings rose 0.5% during the month. As a result, the year-over-year wage metric accelerated to 2.9% in September.

Key Implications

Given all the noise associated with the hurricanes, September's payroll disappointing headline should be discounted. Particularly given the healthy results from the household survey. Wage growth is encouraging, but September's data should be taken with a grain of salt, given that wages might have been affected by the industrial composition of jobs, with the losses seen in relatively lower-paying leisure and hospitality sector potentially affecting the average.

The jobs report is another example of economic data being affected by the Hurricanes, making it more difficult to discern underlying trends in the economy. Looking ahead, we would expect the October jobs report to show a solid rebound. Provided the data excluding the effects of the hurricanes remain solid, we continue to expect the Fed to hike rates in December.

Canada recorded a tenth straight month of job gains as 10k net positions were added in September. The unemployment rate was unchanged at 6.2%. 

Beneath the relatively modest headline were favourable details, as 112k net full time positions were added, while 102k part time jobs were lost on net – a reversal of August's outturn. The public sector led hiring on net, up 26.2k positions as the private sector shed a net 15.5k postions. Accordingly, the overall gain in employment was the result of employees, with self-employment down a tick on the month.

Goods-producing industries led the gain, adding 10.5k positions, with notable strength in construction (+7.4k). The services side of the economy was flat on the month, as healthy gains in educational services (+20k) and trade (+16.6k) were offset by drops in information services (-23.7k) and health care (-10.4k). Other service industries recorded mixed performances.

Looking across the country, Ontario led the way for a third straight month, notching up 34.7k net new positions on a fairly broad-based industry mix. It was a more modest story across the rest of the country, with declines recorded in Alberta (-7.8k), Quebec (-7.6k) and B.C. (-6.7k). 

Wages and hours worked were encouraging. The headline hourly wage rate accelerated further, to 2.2% year-on-year, while hours worked rose 2.4% year-on-year, with the favourable full-time/part-time split helping generate a 0.6% month-on-month increase. 

Key Implications

Is there any stopping the Canadian labour market? While the details have often been mixed, Canada has now turned in ten straight months of job gains, and, in a welcome change, the details of September's report were generally encouraging. While hiring was concentrated in the public sector, you have to go back to 2006 to find a month with stronger full-time job gains, and the unemployment rate remained at a post-crisis low.

Perhaps most welcome in this report is evidence that wages and hours worked appear to be leaving this past spring's weakness behind them. While 2.2% wage growth may not be as robust as Canadians are used to, it is also a far cry from the 0.8% growth averaged during the second quarter.

As always, it must be remembered that this is a very noisy series, and so we shouldn't dwell too much on one month, but the trend this year has been very encouraging as the unemployment rate has dropped 0.7 percentage points, and roughly 250k full-time positions have been added on net.

The Bank of Canada will likely be encouraged again by this report, particularly the recovery in wages, but will weigh its implications alongside other, softer data, such as this week's disappointing trade report. On balance, additional tightening remains likely this year, but the Bank of Canada may not feel the same pressure to move quickly, as evidenced by the more dovish tone of recent communication.