Morning Report
September 02, 2024
“Friday’s non-farm payrolls print takes on some huge importance this week, after the July report set in motion a chain of events that led to the third biggest volatility spike on record, and later the dollar’s worst monthly performance since last year. There is a lot of top-tier data over the next few days, but markets will always be keeping one eye on Friday’s jobs release.”
Tim Hallinan – Trading Director
GBP
Sterling has moved modestly lower from its two-year highs against the dollar over the last week. There are few domestic catalysts in the UK until next week’s deluge, at which point the Bank of England’s September rate decision will come sharply into view. There is a final manufacturing PMI print this morning, a BRC retail sales report tomorrow, and a final services report on Wednesday. But a continuation of the sterling bull trend from August is going to need fuel from somewhere else, with markets looking across the Atlantic for some big labour market data releases.
EUR
Soft inflation dragged the euro away from its one-year highs and down to a two-week low against the dollar last week. A cut at next week’s ECB decision is priced at 99% and expectations have inched up for moves over the medium term, although a marked stickiness in the services inflation figure (4.2%) has kept some policymakers on edge about the lingering upside risks. The key news from the continent comes from Germany this morning amid the far-right’s first regional election win of the postwar period, after the AfD won with 32.8% of the vote in Thuringia and narrowly came in second in neighbouring Saxony. This is a huge blow to Olaf Scholz’s ruling coalition and threatens further political instability in the eurozone, with its constituent parties all managing only single-digit vote percentages. Not great news at a time when the German manufacturing sector is suffering heavily, and the wider economy contracted by 0.1% in Q2. We get a final manufacturing PMI this morning, and the focus in the week is largely on the US labour market.
USD
After a consolidative week that saw the dollar trim some losses against the broad G10, it’s an enormously important week for the dollar and there is one word on every analyst’s lips this morning: payrolls. August was its worst monthly performance so far this year, and its downward trend began with a weak payrolls print (114K) and a sharp uptick in unemployment (to 4.3%) that accelerated a shift in focus for Fed policy from keeping inflation down to ensuring that the labour market does not weaken too much and risk a US recession. Last Friday’s Personal Consumption Expenditures (PCE) report had some relatively promising figures that endorsed the base case for only a 25bps rate cut on the 18th, with consumer spending up another 0.5% in July. However, with spending continuing to outpace income growth, it’s clear that it cannot continue at this pace indefinitely without some Fed support. The consensus is looking for a 163K payrolls print and a slight tightening in unemployment to 4.2%, which likely is not quite enough to prompt an emergency 50bps rate cut. But there is some decent spread in economists’ estimates, and a downside surprise could introduce some much stronger pricing on a supersize move. There is also a bucket of other key labour market data throughout the week to shape the dollar in the lead-up, with the ISM PMIs, JOLTS job openings, ADP non-farms, and jobless claims.
Markets
The European STOXX 600 index hit a record high during Friday’s session as falling inflation boosted optimism around rate cuts and the avoidance of stagflation in the eurozone. US stocks also grinded higher after some healthy consumer spending figures, capping off a net rise in the S&P 500 and Nasdaq through August to near record highs, despite the volatility spike and selloff on August 5th.
Main Economic Events (All Times CET)
10:00am: Eurozone Final Manufacturing PMI
10:30am: UK Final Manufacturing PMI
US Labour Day Holiday
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