The fallout from the last Friday’s surprisingly soft US employment number continues to filter its way through financial markets this morning, with risk appetite getting a positive bid to start the new trading week as expectations for a rate hike from the Federal Reserve in 2015 are ratcheted lower. Equity futures are firmly in positive territory ahead of the opening bell in North America, with high-yielding currencies outperforming as the greenback loses further wind from its sails. For greenback bulls the September employment report was a considerable setback, and while the back-to-back softer than expected non-farm payrolls numbers weren’t the stated reason the Fed held off raising rates last month, it does support their cautious outlook towards the global economic landscape. As market participants continue to digest the greater meaning of September’s employment report in the context of the Fed’s monetary policy framework, there are a few ways Friday’s numbers can be interpreted; the weakness emanating from the labour market is nothing more than a statistical outlier and the US labour market will regain the lost ground in the fourth quarter, or the US economy is failing to hit escape velocity and a faltering labour market will keep the Fed on hold for at least the balance of 2015. The traditionally volatile nature of non-farm payrolls lends us to believe the former is likely the current scenario for the US labour market, as other indicators such as consumption point to the relative strength of the domestic economy. In addition, the US labour market has been on a bastion of strength over the course of 2015, so by proxy it is likely strong enough to withstand a few months of below-trend employment growth. That being said, a strong greenback and weak demand overseas continue to squeeze the export sector which has lead the Atlanta Fed’s GDP tracking estimate for Q3 to drop to 0.8% on an annualized basis, and will likely rule out any chance the Fed decides to move on interest rates at the October meeting. We would view the recent consolidation in the DXY as some exhaustion from the dollar bulls, but the big question is now how far can they bend before the fissures become too wide to ignore. Our base case scenario is there are technically further weak long dollar positions that can be shaken out of the market, but that this setback will provide a good opportunity for those corporations that are naturally short USD to reload their hedges.
European bourses are well situated in the green midway through their trading session, as positive investor sentiment has participants adding high-beta assets to their portfolio while rotating out of traditional safe-haven asset classes. The euro is sustaining a strong bid tone against the big dollar this morning, despite the final composite PMI readings for the Eurozone coming in weaker than expected and missing the original flash readings. While not sufficient by itself to influence market participants’ expectations of the ECB, recall that September’s flash CPI estimate fell back in to deflationary territory, while the ECB cut both its growth and inflation forecasts. The trimming of the growth and inflation forecasts are seen by many as a precursor to the ECB changing the length of time for its asset purchase program or increasing the size. Mario Draghi is speaking on Tuesday of this week, and market participants will be intent on digesting any clues the ECB chief has as to if the central bank will look to alter the size and scale of its monetary policy easing in order to try and bolster the inflation outlook.
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