Morning Commentary: Economic Health Check

Foreign Exchange - Morning Commentary
Economic Health Check
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This Friday’s jobs report for September will be the data highlight for the week.  Currently, market consensus is for an 850K gain which builds on last month’s ~1 million print but also represents a slowdown in the pace of the recovery.  In reality, a slowdown after the initial re-opening bounce was expected.  That this slowdown has been relatively benign is certainly a positive. 

The important question going forward is how long the economy will benefit from easy re-opening-related growth and when the effects of fiscal stimulus start to fade.  Once the re-opening of the economy is complete, we will be faced with a more conventional downturn categorized by a weak labor market that pushes down aggregate demand.  When we hit this point of the recovery, it is reasonable to believe that the recovery will slow significantly.  But how much things slowdown will significantly depend on the unemployment rate (i.e. 6% or 8%).      

The big risk/variable heading into the fall is what happens to the virus during flu season and whether this leads to re-imposition of some restrictions.  Even if official restrictions are light, voluntary restrictions could still make a material impact on economic activity.  This concern combined with fading fiscal support and the negative impact of colder weather on outdoor activities such as dining is a major concern for businesses that are already struggling.  Given the measures taken by authorities, a double dip recession isn’t the base case but certainly the risks of economic stalling are growing.
  • The first presidential debate was held last night and spiraled into chaos with continuous interruptions and insults.  According to a CBS poll, 88% of respondents were either annoyed or pessimistic after the debate.  From a markets’ perspective, the debate has little obvious implications as there was little substantial content.  Given this, markets will be keeping an eye on post-debate polls with state polls more important than national ones.  For what it’s worth, betting odds continue to favor Biden but are largely unchanged from before the debate. 
  • The USD is stronger on the session as the 3rd quarter comes to an end but is materially weaker over the course of the quarter as it is down against all G10 currencies.  As we move through Q4, fading fiscal stimulus and rising COVID-19 infection numbers flag risks for an even more volatile quarter. 
  • House Speaker Pelosi and Treasury Secretary Mnuchin continue their stimulus talks today but not much is expected.  The Democrats have reduced the size of their proposal to $2.2 trillion from $3.4 trillion by reducing the timeline on how long benefits would last, but there remains no indication that Republicans will move up from their number.  On balance, it remains unlikely that a stimulus bill can be reached before the election. 
  • The ADP private sector jobs report beat expectations at 749K against consensus for a 649K print.  Last month’s ADP number was also revised up to 481K from 428K.     
  • Canadian GDP came in better than expected as it rose 3.0% MoM against expectations for a 2.9% increase. 
  • The EU’s Recovery Fund faces a possible delay due to a rule of law dispute with Hungry and Poland.  The European Commission is set to release its first rule of law report that is expected to bring a negative assessment of Hungary and Poland and could tie disbursement of any EU funds to adherence to EU standards.  This is something that Poland and Hungary would reject and raises concerns because passage of the Recovery Fund requires a unanimous vote.  Ultimately, this rule of law issue should prove to be a minor bump in the road as illustrated by the euro’s knee jerk selloff on the news that was followed by a quick recovery. 
  • The GBP was weaker overnight due to a lack of Brexit progress.  This time, the issue concerns the EU’s rejection of the UK’s latest proposal on state aid rules.  This volatility driven by negotiating headlines is likely to continue as we get closer to the negotiating deadline. 
  • China’s manufacturing and non-manufacturing PMI numbers came in better than expected.  China’s continued economic performance and inclusion into the FTSE Russell benchmark index likely draws continued inflows and should keep the yuan supported.
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