FX - The Week Ahead: DXY could stay in the 102-103 range as markets re-assess rate cut expectations following US jobs report beat

September jobs report much stronger than expected

• USD: Nonfarm payrolls rose by a significant 254k jobs in September, much stronger than the 70k increase we had been expecting and stronger than consensus at 150k. Private payrolls rose 223k while manufacturing employment fell 7k. Total payroll growth in August was revised higher from 142k to 159k and higher in July to 144k. Employment in the household survey rose a strong 430k. Average hourly earnings rose 0.4%MoM and were revised higher in August to 0.5%.
• USD: And for those who have feared or stoked fears of the Sahm rule becoming prophecy for the economy, the unemployment rate fell back to 4.1% with the labor force participation rate unchanged at 62.7%, as the household survey reported strong employment growth as well, and no change in the labor force participation rate. There are risks of statistical anomalies around this time of the year, so today’s data cannot fully put a nail in the coffin of recession worry, but it will likely go a long way to relieving market anxiety.
• USD: September job growth was led by leisure and hospitality (+78k) and health services (+72k). This seems very counter to declining hiring rates in both of these sectors and especially falling real restaurant sales in both quarters this year. In the past there has been substantial residual seasonality in September, likely due to sectors like leisure/hospitality where employment typically declines in September after the summer. Very low quits in August JOLTS data (reflecting the full month) suggests separations through the first two weeks of September may have been particularly low. Low separations in a month where private employment typically declines by around 650k would mean a strong seasonally adjusted increase. More of this correction could come in October.

Week Ahead:

US – September inflation data and U of Michigan survey

• USD: US October CPI report, CPI MoM – Citi forecast: 0.1%, median: 0.1%, prior: 0.2%, CPI YoY – Citi forecast: 2.2%, median: 2.3%, prior: 2.5%, CPI ex Food, Energy MoM – Citi forecast: 0.3%, median: 0.2%, prior: 0.3%, CPI ex Food, Energy YoY – Citi forecast: 3.1%, median: 3.2%, prior: 3.2%, CPI Index NSA – Citi forecast: 314.692, median: 314.860, prior: 314.796, After a stronger 0.28%MoM increase in core CPI in August, Citi Research expect a similarly stronger increase of 0.25%MoM in September that would also round to 0.3%, albeit for slightly different reasons. This currently translates to 0.22% core PCE in Citi Research’s forecasts. Headline CPI should rise a more modest 0.1%MoM and will be close to touching 2%YoY at 2.2%. Energy prices should decline again with falling gas prices and food prices should rise modestly.
• USD: US October PPI, PPI Final Demand MoM – Citi forecast : 0.2%, median: 0.1%, prior: 0.2%, PPI Final Demand YoY – Citi forecast: 1.7%, median: NA, prior: 1.7%, PPI ex Food, Energy MoM – Citi forecast: 0.2%, median: 0.2%, prior: 0.3%, PPI ex Food, Energy YoY – Citi forecast: 2.7%, median: NA, prior: 2.4%, PPI ex Food, Energy, Trade MoM – Citi forecast: 0.2%, median: NA, prior: 0.3%, PPI ex Food, Energy, Trade YoY – Citi forecast: 3.2%, median: NA, prior: 3.3%, Citi Research expect a 0.2%MoM increase in PPI final demand in September with a similar increase in core PPI that excludes food, energy, and trade services. This would be modestly weaker than PPI in August but with some slight upside risks, particularly to core PPI services prices. This could be due to stronger increases in certain financial services prices in line with rising asset prices, a dynamic that would also boost PCE inflation and could continue in October data as well. There remain some upside risks to medical services prices in any given month as these have been particularly soft recently. But this upside may come more in October at the start of a new quarter, when medical services prices increased notably last year. Airfares, the last key component of PPI data for PCE inflation, should remain on the softer side.
• USD: U of Mich Sentiment – Citi forecast: 71.0, median: 70.3, prior: 70.1, 1 year Inflation Expectations – Citi forecast: 2.8%, median: NA, prior: 2.7%, 5-10 year Inflation Expectations – Citi forecast: 2.9%, median: NA, prior: 3.1%, The University of Michigan Sentiment Index has picked up somewhat in recent months but remains generally subdued, at levels lower than during the height of the Covid pandemic. Consumers are still feeling the pinch of a higher level of prices with the buying conditions index is not far from the lows of the last couple of years. The current assessment of personal finances is subdued, too. Citi Research expect some further modest increase in the sentiment index in the October preliminary release to 71 from 70.1 with gas prices and realized inflation falling. 1y inflation expectations have been falling with gasoline prices but 5-10y inflation expectations have moved modestly higher. Citi Research expect 1y inflation expectations to move up very modestly to 2.8% from 2.7% but for the 5-10y inflation expectations to converge lower to 2.9% closer to 1yr expectations.

Japan – Real household spending and current account balance

• JPY: Real Household Spending, (two-or-more-person households) (Aug): Citi  Forecast: -3.3% YoY, Previous: 0.1% YoY, Real spending of all households (consisting of two people or more) probably decreased 3.3% YoY in August, down from a 0.1% YoY gain in July. Real spending rebounded in August 2023 from a plunge in July 2023, and we expect the base effect to result in renewed negative YoY growth in August this year. On an MoM basis, Citi Research pencil in a 0.3% increase in August after a 1.7% drop in July. Citi Research’s estimation shows that real retail sales grew 0.3% MoM in August. However, spending on services was probably weak due to the impact of earthquakes and typhoons. On average, given that spring wage hikes and summer bonuses have been supporting a clear improvement in real disposable income, Citi Research expect consumer spending to rebound in the third quarter.
• JPY: Balance of Payments, Current Account (Aug): Citi Forecast: ¥2936.8 bn NSA; ¥2279.7 bn SA, Previous: ¥3193.0 bn NSA; ¥2802.9 bn SA, Citi Research expect the current account balance to generate a ¥2.9368trn surplus before seasonal adjustment and a ¥2.2797trn surplus after adjustment in August (+¥3.1930trn and +¥2.8029trn, respectively in July). The surplus after seasonal adjustment likely decreased in August. On a seasonally adjusted basis, Citi Research expect a ¥509.5bn deficit in the trade balance (-¥392.7bn in July), a ¥324.4bn services deficit (-¥305.8bn), a ¥3.3486trn surplus in primary income (+¥3.7123trn) and a ¥234.9bn gap in secondary income (-¥210.9bn). The trade deficit probably increased modestly in August as exports likely decreased more than imports did. Citi Research pencil in a drop in primary income surplus, reflecting yen appreciation and lower overseas interest rates.

Commodity Bloc – Canada employment and NZ rate decision

• CAD: Canada employment: Net Change in Employment (Sep) – Citi: 10k, median: 34.9k, prior: 22.1k, Unemployment Rate – Citi: 6.8%, median: 6.6%, prior: 6.6%, Hourly Wage Rate Permanent Employees – Citi: 4.8%, median: NA, prior: 4.9%, Citi Research expect a modest 10k increase in employment in September, softer than the 22.1k increase in August and implying that the unemployment rate would rise further to 6.8%. Job growth has slowed substantially in the last few months, with continued population increases helping to push the unemployment rate notably higher as demand for workers has not kept up with supply of labor. While volatile month-to-month, employment has even outright declined in the last few months. Some strength in August could also moderate in September, for instance in a sector like education where employment can be volatile around the start of the school year. Wage growth has been sticky despite weakening labor demand, but Citi Research expect a modest easing to 4.8% in September.
• NZD: NZ RBNZ OCR Decision and Monetary Policy Review, Citi forecast; -50bps to 4.75%, Previous; -25bps to 5.25%, The RBNZ is set to accelerate its pace of easing next week and cut the OCR by 50bps. Previously Citi Research had expected a 25bps cut. Consensus and market pricing has firmly shifted to this view, and that’s fair given the speed at which the global easing cycle has accelerated in recent weeks. Ultimately, an OCR of 5.25% is too restrictive when the economy has entered a cyclical downturn. Although GDP growth was better than expected since the August SMP, the outlook for consumption growth, and also the labour market, remains grim. Recent QSBO business survey data once again indicated that price pressures have curtailed sharply in response to slowing aggregate demand and a negative output gap.

Asia EM – China CPI, PPI and money supply

• CNH: China CPI: Citi forecast 0.5%YoY, previous 0.6% YoY, CPI may no longer enjoy a boost from pork prices with the latter staying largely flat. Vegetable prices could have another leg up albeit much milder compared with August. Services prices could turn even softer according to the earlier released PMIs.
• CNH: China PPI: Citi forecast -2.5% YoY, previous -1.8% YoY, the picture on PPI could be equally dull with the manufacturing PMI survey. The prices of major commodities were mixed, with Brent oil prices down –8.1%MoM and rebar prices up 2.9%MoM. End-September volatilities may have not passed through to PPI yet.
• CNH: China Money supply: Citi forecast M1 -7.5% YoY, M2 6.4% YoY, New Yuan loans 2000 CNY bn, Total social financing 3800 CNY bn, previous M1 -7.3% YoY, M2 6.3% YoY, New Yuan loans 900 CNY bn, Total social financing 3031 CNY bn, the credit data could still provide the first clues for stimulus impact with its details. Three things should be watched. [1] Fiscal policy: government bond issuance matters, and even more so for fiscal deposit changes. Exhausting approved quota for the year is a necessary condition for budget revision and fiscal deposits could help to quantify funds deployment. [2] Household: The focus is on the deposits side. With the strong rally in the last week of September, it would be interesting to watch how the number evolved. [3] Monetary growth: Citi Research don’t expect much upside for September, but both M1 and M2 growth could echo fiscal policy deployment should any upside materialize.