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Nonfarm Payrolls in the US are expected to come in above “normal” once again. That would affirm the notion that the US employment situation remains "hot", and that the Fed can focus on getting inflation down.

The total number of people employed in the US is higher now than it was before the pandemic, suggesting that the jobs market has at least nominally recovered. However, the participation rate, and the share of the population holding down a full time job is less than it was at the start of 2020.

The main drivers

According to the latest BLS report, there were over 10.1M job openings, but just 6.0M people looking for a job. The labor market remains extremely tight, but the gap continues to narrow. The implication is that the labor market is heading towards being balanced, though there is still some time to go. The Fed, therefore, has room to keep raising rates, but that room isn't unlimited.

Crucially, in August there were 344K jobs created, but the number of open jobs dropped by 1.1M. Meaning that demand destruction is the larger component of the labor market rebalancing. Translated to non-economic speak, that means that more job openings are being closed because businesses are no longer seeking, than because they've hired someone.

What it means for the markets

A tight labor market is generally understood to push wages higher, as employers try to attract talent. However, so far this cycle, wage increases have been slower than inflation. Which means that the average real wage has been falling for several months. This could contribute to demand destruction as the average American has less purchasing power. According to the most common economic theory among central bankers and the government, this implies an increased risk of a recession.

In fact, because wages aren't growing as fast as inflation, this could motivate the Fed to be even more aggressive in tightening. As long as wages aren't significantly outpacing inflation, then the Fed actually likes labor market tightness, because it supports economic growth, according to them.

What to look out for

September US NFP are forecast at 250K compared to 344K in August. As usual, the prior month could be revised, and also affect market outlook. Since a "normal" NFP is around 200K, any figure above that is likely to support further Fed tightening and weigh on the stock market.

The unemployment rate is expected to remain stable at 3.7%. But, that was also the case last month, when analysts were surprised with an increase in the unemployment rate driven by increased labor force participation. With pocketbooks coming under pressure from inflation, it's not surprising that more people would be out looking for work, which could once again distort the projections.

Markets

UK gilts underperformed German Bunds and US Treasuries today. Fitch’s decision to lower the outlook on the country’s AA- rating from stable to negative triggered the move. The rating agency cited increased fiscal risks coming from the government’s lavish spending plans. UK yields add 10.2 bps (2-yr) to 14.3 bps (30-yr) with intraday dynamics at the very long end suggesting some meddling by the Bank of England. Sterling underperformed marginally with EUR/GBP setting and intraday high near 0.8790 from an open at 0.8720. US yield changes vary between -0.2 bps (30-yr- and +2.3 bps (5-yr). It’s a relative quite day for US investors following ISM’s and ADP employment earlier this week. Weekly jobless claims increased slightly more than expected (190k to 219k), but remain near historically low levels. US markets today clearly trade with tomorrow’s payrolls in mind. The German yield curve steepens with yield changes ranging between -2.5 bps (30-yr) and 4.7 bps (2-yr). There’s again a strong outperformance of bonds compared to swaps. The European swap rate curve rises up to 9.3 bps at the front end. Moves at the shorter tenors aren’t related to the publication of ECB Minutes. On the contrary. Yields temporary dipped as they revealed that some officials proposed a 50 bps rate hike instead of 75 bps given recession risks. The overall tone remained more hawkish though. Growth concerns shouldn’t prevent forceful rate hikes. Even chief economist Lane warned that price pressures are likely to persist. The euro failed to profit from the interest rate support with EUR/USD losing the 0.99 big figure again to currently change hands below 0.9850. Overall risk sentiment is sluggish with European indices losing around 0.5% after a positive open and the UK FTSE underperforming (-1%). Yesterday’s big OPEC production cut grabs a lot of attention, but Brent crude trades flat near $93.25/b. The commodity rallied the days ahead of the decision as the 2mn barrels/day production cut was rumoured.

News Headlines

Momentum in retail sales in Hungary and the Czech Republication is deteriorating quite substantially. The Czech statistical offices reported that sales in retail trade (real terms) in August declined 0.7% M/M to be 8.8% lower compared to the same period last year. (Real) sales of non-food goods decreased 10.3% Y/Y, sales of automotive fuels declined 9.2%. Real food sales were 6.6% lower compared to last year. In a comment, the CZSO indicated that sales declined across all categories except for chemist, medical and orthopedic goods. Retail trade in Hungary also slowed substantially more than expected to 2.4% Y/Y from 4.3% Y/Y in august. Sales of food decreased by 2.4% Y/Y. Non-food sales increased slightly (+0.5%). Automotive fuel sales were 18.4% higher compared to the same period last year. Data suggest that domestic demand in both countries is slowing. Both the Czech central bank and the Hungarian central bank will take this into account when assessing the supply and demand balance in their economies as they look for a deceleration of price growth.

In a letter to the Chair of the UK Treasury Committee, Deputy BoE Governor for Financial Stability Cunliffe provided an explanation for the Bank’s unusual market intervention as the BoE deployed a £65bn program to stabilize the market in long dated Gilts last week. The letter describes how this market destabilized after the announcement of the Mini budget by Treasury secretary Kwarteng on September 23. Especially the likelihood that liability-driven investments funds (LDI’s) that are used by pension funds would be forced to further sell huge amounts of long term Gilts caused to BoE to step in. The BoE also clearly stated that the program only aimed at restoring financial stability. The “operations are not intended to create central bank money on a lasting basis, nor are they designed to cap or control long-term interest rates”. Once the purchase program is completed and risks to market functions are judged by the BoE to have subsided, the operation will be unwound in a smooth and orderly fashion.

• EURGBP reversed from support level 0.8675
• Likely to rise to resistance level 0.8800

EURGBP currency pair recently reversed up from the key support level 0.8675 (previous monthly high from June), intersecting with the 61.8% Fibonacci correction of the upward impulse from August.

The upward reversal from this support level 0.8675 stopped the earlier short-term impulse wave A.

Given the clear daily uptrend, EURGBP currency pair can be expected to rise further toward the next resistance level 0.8800.

• GBPUSD reversed from resistance level 1.1490
• Likely to fall to support level 1.1000

GBPUSD currency pair recently reversed down from the key resistance level 1.1490 (former strong support from the start of September), intersecting with the 61.8% Fibonacci correction of the earlier sharp downward impulse from August.

The downward reversal from this resistance level 1.1490 stopped the earlier short-term impulse wave (a) of the higher order ABC correction 2.

Given the clear daily downtrend, GBPUSD currency pair can be expected to fall further toward the next support level 1.1000.

Cable remains in red for the second day, pressured by weaker risk sentiment and downbeat report from the BoE, which showed raised expectations for inflation in one year time to 9.5% from 8.4% estimation in August and expectations for 4.8% inflation in three years.

Inflation in UK eased to 9.9% in September from 10.1% in August, but still about five times above the central bank’s 2% target.

BoE remains on track for further rate hikes to in fight to bring red-hot inflation under control, though high borrowing cost would further hurt already weakened economic growth.

Overall negative near-term picture could be partially offset by better than expected UK PMI data which showed unexpected increase of activity in construction sector, sending the index to three-month high.

Daily studies show near-term structure weakening, following a pullback after repeated reject at round-figure 1.15 resistance, as negative momentum is rising and stochastic emerging from overbought territory. Fresh bears tested initial support at 1.1225 (Fibo 23.6% of 1.0348/1.1495 recovery leg), but need break here to further weaken near-term structure and open way for attack at key supports at 1.1082/1.1057 (10DMA/Fibo 38.2%) and psychological 1.10 level, to generate stronger reversal signal on break. Falling 30DMA offers immediate resistance at 1.1373, guarding the upper pivot at 1.1500, violation of which would bring bulls back to play.

Res: 1.1373; 1.1410; 1.1460; 1.1500.
Sup: 1.1225; 1.1082; 1.1057; 1.1000.

Daily Pivots: (S1) 0.9816; (P) 0.9906; (R1) 0.9976; More...

Intraday bias in EUR/USD stays neutral at this point. On the downside, break of 0.9734 minor support will suggest rejection by 55 day EMA, and medium term falling channel. Bias will be turned back to the downside for retesting 0.9534 low and then resume down trend. Nevertheless, considering bullish convergence condition in daily MACD, sustained break of 55 day EMA (now at 1.0019) will raise the chance of medium term bottoming at 0.9534. Further rally should then be seen to 38.2% retracement of 1.1494 to 0.9534 at 1.0283.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Daily Pivots: (S1) 1.1206; (P) 1.1350; (R1) 1.1473; More...

Intraday bias in GBP/USD stays neutral at this point. On the downside, break of 1.1023 minor support will indicate that rebound from 1.0351 is over. Intraday bias will be back on the downside for retesting 1.0351. On the upside, firm break of 61.8% retracement of 1.2292 to 1.0351 at 1.1551 will pave the way to 1.2292 resistance.

In the bigger picture, fall from 1.4248 (2018 high) is resuming long term down trend from 2.1161 (2007 high). Next target is 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532. There is no scope of a medium term rebound as long as 1.1759 support turned resistance holds.

Daily Pivots: (S1) 143.86; (P) 144.36; (R1) 145.18; More...

No change in USD/JPY's outlook as consolidation from 145.89 is still extending. Intraday bias stays neutral and further rally is expected as long as 139.37 resistance turned support holds. Break of 145.89 will target 147.68 long term resistance. On the downside, however, decisive break of 139.37 will confirm short term topping. Deeper decline would be seen back towards 130.38 support.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high). For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Daily Pivots: (S1) 0.9784; (P) 0.9836; (R1) 0.9888; More...

USD/CHF is still extending the consolidation pattern form 0.9964 and intraday bias remains neutral. Outlook is unchanged that further rally is in favor as long as 0.9694 support holds. On the upside, above 0.9964 will resume the rally from 0.9369 to retest 1.0063 high. On the downside, however, break of 0.9694 support will extend the corrective pattern from 1.0063 with another falling leg, towards 0.9478 support first.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

The forex markets are very quiet today, with major pairs and crosses stuck inside yesterday's range so far. Dollar is trying to recover but lacks sustained buying. Traders are clearly holding the bets before tomorrow's non-farm payroll report. As for the week, the greenback remains the worst performer, followed by Yen and Swiss Franc. Commodity currencies are the stronger ones, but they're just in corrective recovery. Euro and Sterling are mixed.

Technically, if Dollar is going to resume it's prior up trend, it will more likely breakout against commodity currencies first, with help from return of risk-off sentiment. Thus, some focuses will be on 0.6362 temporary low in AUD/USD and 1.3832 temporary top in USD/CAD. Break of these levels could be a prelude to more broad-based comeback of the greenback.

In Europe, at the time of writing, FTSE is down -0.95%. DAX is down -0.18%. CAC is down -0.59%. Germany 10-year yield is up 0.0143 at 2.042. Earlier in Asia, Nikkei rose 0.70%. Hong Kong HSI dropped -0.42%. Singapore Strait Times dropped -0.05%. Japan 10-year JGB yield dropped -0.0059 at 0.244.

US initial jobless claims rose to 219k, above expectation

US initial jobless claims rose 29k to 219k in the week ending October 1, above expectation of 205k. Four-week moving average of initial claims rose 250 to 206.5k.

Continuing claims rose 15k to 1361k in the week ending September 24. Four-week moving average of continuing claims dropped 10k to 1371k.

ECB accounts: Some members preferred 50bps hike in Sep

The accounts of ECB's September 7-8 monetary policy meeting showed that a "very large number" of committee members expressed a preference for a 75bps hike, which was "a proportionate response" to upward revisions to inflation outlook and an important signal of the determination to bring inflation back to target in a "timely manner".

But "some members" preferred a 50bps hike as that would be "large enough to signal determination in proceeding with the interest rate normalization". With the "looming risk of a recession", a 50bps hike as part of a "sustained path towards more neutral rate levels" might prove "sufficient" to return inflation to target. "What needed to be addressed was the risk of the sharp rise in inflation, exacerbated by the war, destabilizing inflation expectations," the account noted.

But add the end, all members joined a consensus for the 75bps hike, while maintain that policy should "not follow a pre-set path", and be set on a "meeting-by-meeting basis.

Eurozone retail sales volume dropped -0.3% mom in Aug, EU down -0.2% mom

Eurozone retail sales volume dropped -0.3% mom in August, matched expectations. Retail trade volume decreased by -0.8% for food, drinks and tobacco, while it increased by 0.2% for non-food products and by 3.2% for automotive fuels.

EU retail sales volume dropped -0.2% mom. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in the Netherlands (-2.2%), Germany (-1.3%) and Malta (-1.1%). The highest increases were observed in Slovenia (+7.0%), Luxembourg (+3.8%) and Ireland (+3.5%).

UK PMI construction rose to 52.3, but optimism sank

UK PMI construction rose from 49.2 to 52.3 in September, above expectation of 48.1. S&P Global said total industry activity rose for the first time three months. Output growth was linked to work on delayed projects. Business optimism was the lowest since July 2020 as new orders stalled.

Tim Moore, Economics Director at S&P Global Market Intelligence, said: "Forward-looking survey indicators took another turn for the worse in September, with new business volumes stalling and output growth expectations for the year ahead now the lowest since July 2020. This reflected deepening concerns across the construction sector that rising interest rates, the energy crisis and UK recession risks are all set to dampen client demand in the coming months."

NZ Robertson not concerned with NZD outlook, NZD/USD extending recovery

New Zealand Deputy Prime Minister Grant Robertson said today that it's going to be a "challenging year" with "global slowdown". New Zealand would see "less demand and some slowdown". But, "that doesn't mean, to me, a recession. There is balance to struck here."

"Monetary and fiscal policies need to be coordinated, to work together," he said. "As interest rates rise they'll restrict demand." He also said that he's "not concerned on the long-term outlook for the New Zealand dollar."

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9784; (P) 0.9836; (R1) 0.9888; More...

USD/CHF is still extending the consolidation pattern form 0.9964 and intraday bias remains neutral. Outlook is unchanged that further rally is in favor as long as 0.9694 support holds. On the upside, above 0.9964 will resume the rally from 0.9369 to retest 1.0063 high. On the downside, however, break of 0.9694 support will extend the corrective pattern from 1.0063 with another falling leg, towards 0.9478 support first.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Economic Indicators Update