Weekly Market Update 6 Nov – Job Report Upends Dollar’s Consolidation, Plunging to 105

Weekly Market Update 6 Nov – Job Report Upends Dollar’s Consolidation, Plunging to 105

1. The dollar consolidated throughout last week until the job reports came out underwhelming, which saw the dollar’s treacherous slide to close at 105. Despite the Employment Cost Index (ECI) q/q coming out stronger-than-expected at 1.1% growth, the dollar still weakened as more timely economic indicators like JOLTs, NFPs, and unemployment claims have generally shown an easing in labour market dynamics. Furthermore, dejected consumer sentiment, due to prevailing high interest rates and geopolitical tensions, from the Conference Board (CB) sent the dollar lower on Monday. On Wednesday, ADP NFP came in weaker at 113K jobs introduced compared to consensus of 149K, while a surge in JOLTS jobs openings at 9.55M helped offset dollar weakness, in light of the FOMC decision on Thursday morning. Ultimately, FOMC’s decision to halt rates, leaving rates at 5.50%, sent the dollar crashing as market prices fell at the possible end of the rate hike regime. Coupled with meek NFP and unemployment rates, reporting at 150K and 3.9% respectively, the labour market seemingly bends towards normalisation and wage pressures are coming down. Key highlights of this week lies in the speeches of many FOMC members’ speeches, markets will seek clues on FOMC’s monetary stance moving forward in an increasingly volatile financial market.

2. The euro, saved by the exodus of dollars on the US’s rate decision and NFP print, closed above $1.07 against the greenback. Subdued CPI prints across eurozone economies like Germany and Spain, both revealing growth of 0.0% and 3.5%, reveals waning price pressures as energy prices fell. Eurozone CPI flash estimate y/y at 2.9% growth, coupled with rise in unemployment rate to 6.5% in September 2023, provides impetus to believe the ECB is mostly done with its rate hike regime. This week, markets anticipate reports on eurozone services PMI and speech from German Buba President Nagel and ECB President Largarde speech on Euro’s monetary policy.

3. The pound sterling strengthened against the US dollar, closing the week at $1.23. The Monetary Policy Committee (MPC) concluded its meeting on November 1, with a 6-3 majority decision to maintain the Bank Rate at 5.25%, while three members advocated for a 0.25% increase to 5.5%. These decisions are contingent on the expected path of the Bank Rate, which is projected to stay around 5.25% until the third quarter of 2024, gradually declining to 4.25% by the end of 2026, marking a more conservative trajectory compared to previous forecasts. UK GDP in the third quarter of 2023 is predicted to remain flat, with some business surveys indicating a potential decline in Q4. The MPC remains committed to its inflation target, underscoring the enduring importance of price stability in the UK’s monetary policy framework. This week, markets await BOE governor Bailey speech and GBP m/m figures, with expectation of a 0.0% stagnancy, to ascertain future rate decision.

4. Last week, the Japanese yen breached the significant level of 151 against the US dollar, driven by the Bank of Japan’s (BOJ) reluctance to adjust its short-term negative interest rate. However, it later reversed its losses following disappointing US employment payroll data, ending the week at 149.50 against the dollar. On Tuesday, the BOJ maintained its negative interest rate policy at -0.10% and its 10-year Japanese Government Bond (JGB) yield target at 0%. Notably, it expanded the previously fixed cap of 1% on yields to a flexible reference range of 100 basis points up or down, compared to the prior 50 basis point target. This shift reflects the BOJ’s commitment to maintaining flexibility in its Yield Curve Control (YCC) framework, possibly driven by a desire to alleviate the yen’s weakness due to speculative pressures. Looking ahead, a substantial rise in 10-year JGB yields could lead to the repatriation of Japanese investors’ foreign assets, potentially strengthening the yen. This week, investors will be closely monitoring BOJ Governor Ueda’s speech and consumer finance data to gain insights into the future interest rate outlook.

5. The aussie rose and closed above $0.65 against the dollar as retail spending proves more resilient than expected. Driven by spendings within department stores and household goods, retail sales m/m grew by 0.9%, outperforming forecasts of 0.3%. However, goods trade balance came out weaker-than-expected at 6.79Bn in September 2023, reflecting weak global demand. This week, investors await cash rate decision by the RBA, with expectations of a 25 bps rate hike to tame recent inflationary pressures. The loonie strengthened against the dollar to close slightly above 1.36 last week. Stagnant GDP m/m of 0.0% growth, worsening employment market figures with unemployment rate at 5.7% and a bleak 17.5K in employment for October. The pessimism surrounding these figures, were fortunately buoyed by the BoC’s cautious stance on interest rates where they have acknowledged the potential resurgence of inflation due to possible rise in energy price and surging home prices. The kiwi capitalised on the dollar’s weakness to close at $0.60 last week. Similar to the loonie, employment figures released spell trouble for its economy as employment change q/q fell by 0.2% and labour cost index q/q cooled to 0.8% growth, signalling easing of inflationary pressures. Expectation for inflation are due next week, where markets can gain insights into consumer spending, and hence the economic outlook in New Zealand.

6. The oscillation in bullion prices is a result of the market’s risk sentiment being influenced by the interplay between declining treasury yields and geopolitical tensions in the Middle East. In the end, despite the decrease in the US Dollar Index (DXY), gold prices experienced a decline and concluded at $1992 per ounce. It is important to recognize that the DXY may not serve as the most accurate indicator for gold prices, as its decline might reflect the diminishing US treasury yields. These yield reductions are primarily due to economic data indicating a weakening economic environment, leading the market to factor in expectations of lower interest rates. Such anticipation of lower rates could potentially foster a revival of risk-on sentiments, as demonstrated by the upsurge in stock markets shortly after the Federal Reserve’s decision to halt interest rate increases.