Morning Commentary: Beauty is in the Eye of the Beholder

Foreign Exchange - Morning Commentary
Beauty is in the Eye of the Beholder
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
After absorbing two very weak key U.S. economic indices and watching equities and interest rates move to near panic situations this week, the market had mentally downgraded expectations for today’s U.S. jobs report. Investors remain apprehensive and nervous that the expanding and continuing trade war will cause the U.S. economy to continue to weaken. With manufacturing and brick and mortar retail near recession levels already, the consumer’s continued buying power and demand will be key going forward to sustain economic growth of nearly 2%.

Today’s U.S. jobs report for September largely met original market consensus which has provided a sigh of relief and a pause in the short term negativity plaguing the market. U.S. interest rates have rallied slightly after collapsing this week, and the DXY is mixed today.  The NFP component was below expectations at 136,000 against expectations for 145,000. There were upward revisions to the previous months, but they were almost all related to government hiring which carries less weight than the private sector.

The highlight of the report was that the UR dropped from 3.7% to 3.5% which is a 50-year low.  The labor force participation rate remained unchanged at 63.2%. Average hourly earnings, which is another key metric inside the report, was disappointing as it came in weaker than forecast at 0.0% and the YoY dropped to 2.9%. Other good news within the report was the fact that the jobless rate for Hispanics hit a new record low and the UR for African-Americans maintained its lowest rate ever.

Bottom line : Job growth continues to decelerate from last year. The average NFP in 2019 is 161,000 and declining; the average NFP in 2018 was 223,000. Markets have moved this week from a 53% probability of a Fed rate cut later this month to 92% today. The market continues to price in at least three more Fed rate cuts, and with U.S. interest rates declining while other G10 rates remain relatively steady, the U.S. dollar (DXY) looks more vulnerable going forward.
  • The Reserve Bank of India cut interest rates by 25 bps to 5.15% as expected. The central bank has continued to cut rates by small increments for the fifth time this year bringing the total to 135 bps of cuts.  There was another sharp downgrade by the central bank for future growth, and the market continues to build in expectations for more rate cuts. The Indian rupee is unchanged on the session.
  • The U.S. trade deficit widened in August by more than consensus estimates to $54.9 billion primarily due to a record level of imports of consumer goods. Even as the trade deficit increased, the trade deficit with China declined sharply by 3.1% for the month. YoY, the trade deficit with China has fallen by 11.4%. The trade deficit with Germany rose to the highest level on record thanks to a record level of imports.
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