FX - The Week Ahead: US October jobs data gets a fleeting reaction from markets

US October jobs impacted by strike and hurricanes

• USD: Data released Friday shows US nonfarm payrolls up by a very modest 12k jobs in October, weaker than consensus expectations for an 100k increase with payroll employment also revised substantially lower by 112k in the last two months, particularly in August. The data shows the unemployment rate rising from 4.05% in September to 4.145% in October, just barely still rounding to 4.1% while the labor force participation rate declines from 62.70% to 62.56%. However, average hourly earnings rise 0.4%MoM, stronger than expected but with downward revisions to 0.3% in September and average weekly hours remain at an upwardly revised 34.3. Meanwhile, employment in the household survey falls by 368k after a strong 430k gain in September.
   
• USD: Temporary factors are likely to be weighing on payroll employment by up to 100k in October. The below-consensus US jobs data for October appears to have been impacted from the hurricanes. In October, 512K could not work because of weather impact (this is a not-seasonally adjusted number). The average is 264K in October. This impact will largely reverse next month. Nevertheless, August and September’s revision lower still points to weakness in the US labor market. Data in November will likely be needed to assess how much of a drag weather is on October data but based on continued signs of fundamentally weakening labor demand, risks are skewed towards November payrolls underwhelming expectations.

A mixed JOLTS report, ISM manufacturing at 2024 lows while GDP still expands

• USD: Data released Friday shows the ISM manufacturing index for October falling from 47.2 in September to 46.5 in October, contrary to expectations for a modest tick up. The fall is driven by declines in the production index, down to 46.2. The Employment index moves up to 44.4 from 43.9 but remains in contractionary territory as does the New Orders index, up at 47.1 from 46.1. The October figure is the lowest reading this year and remains in contractionary territory, pointing to a weakened manufacturing sector, in line with lower manufacturing production, lower manufacturing payrolls, and falling capital goods shipments.
   
• USD: In data released earlier last week, US Q3 real GDP advances a solid 2.8% annualized with real consumer spending up a stronger than expected 3.7%. With most estimates of potential growth near 2% that could raise concerns that the output gap is closing further which in theory could raise inflationary pressure. But that theoretical interpretation of the GDP data is at odds with the reality of data on prices and labor markets. Q3 core PCE cools to 2.2% with the slowdown not just in goods but also now in services and shelter.
   
• USD: Meanwhile, JOLTS job openings data also released last week falls substantially in September to 7.44 million from a downwardly revised 7.86 million in August. Details of the report are mixed with the hiring rate increasing in September to 3.5%. from an upwardly revised 3.4% in August but the quit rate declining to 1.9% from an upwardly revised 2.0% (from 1.9% initially). Quit rates remain very low, consistent with consumer perceptions of the labor market still worsening on average. Most interesting in the September JOLTS data is an increase in layoffs. While the layoff rate is still low at 1.2%, this is the highest in about 1.5 years.

September inflation slightly hotter than expected - PCE, ECI make Q3 look like a soft landing

• USD: Data released last week shows US core PCE inflation in September close to consensus at 0.254%MoM, a touch stronger than consensus but details showing a slowdown in shelter inflation. Meanwhile, the August core PCE reading is revised up from 0.13%MoM to a still sub-target 0.16%MoM.
   
• USD: The Employment Cost Index (ECI) advances 0.785%QoQ in Q3 which annualizes to 3.2%. Goods production wages accelerate but less volatile service sector wages slow to 0.78% - a rate of increase that is in the range of pre-pandemic wage growth. Private sector wages also slow to 0.73% - the slowest rate of increase since 2021.
   
• USD: Low unemployment, steady 2.8% real GDP growth driven by consumer spending, 2.2% core price growth and an employment cost index that annualizes to 3.2% are the type of readings that would characterize a US soft landing. Against this backdrop the marginal pickup in core PCE inflation to 0.254%MoM in September (3.1% annualized) should not be too concerning.

Week Ahead:

US – Presidential and congressional elections and FOMC meeting in focus this week

• USD: The US presidential election is on Tuesday, November 5th. Over 50 million people have voted already, but there are no strong leads to be drawn from the early vote given changes in voting behavior. Trump has been closing the margin in national polls and swing states show a statistically tied race. Prediction markets are currently showing about 50% probability of a Trump victory, but an error in polling could mean either candidate sweeping all swing states. Markets will be following the Senate races in Nebraska, Ohio, and Texas closely. North Carolina and Georgia are expected to be the first swing states to release results and could give an indication for which candidate will win the presidency.
   
• USD: Fed FOMC meeting – Citi Forecast 4.50 – 75%, Consensus 4.50 – 75%, Prior 4.75 – 5.00% - the Fed will likely announce a 25bp rate cut at this week’s FOMC meeting. The market is current pricing less than 50bps for the November and December meeting but a likely more dovish Fed Chair Powell relative to market concerns of a reacceleration in growth and inflation and emphasis on the need for more data amid disruption from the hurricanes in the October jobs report, could see a more dovish reaction from the oversold (overbought) US Treasuries (DXY) markets.
   
• USD: US October ISM Services – Citi: 54.3, median: 53.0, prior: 54.9 - Services PMIs have remained in expansionary territory unlike manufacturing PMIs that have been weaker. Services consumption has continued to grow in both nominal and real terms. ISM Services surprised higher in September as the new orders and business activity sub-indices surged higher. Citi Research expect ISM Services to remain in expansion in October but decline modestly to 54.3 from 54.9, pointing to a somewhat slower pace of growth in services activity. The employment sub-index should remain below 50 as businesses remain cautious to increase headcount.
   
• USD: University of Michigan Sentiment – Citi: 71.8, median: 70.6, prior: 70.5; 1-year Inflation Expectations – Citi: 2.7%, median: NA, prior: 2.7%; 5-10 year Inflation Expectations – Citi: 2.9%, median: NA, prior: 3.0% - the University of Michigan Consumer Sentiment Index, although off the lows from 2022, has remained at generally more subdued levels as a higher level of prices and interest rates have weighed on consumer confidence. Citi Research expect the consumer sentiment index will increase to 71.8 from 70.5 in November. 1y inflation expectations have declined to levels that are within the pre-pandemic range. 5-10y inflation expectations are still a bit above the typical pre-pandemic range but are not at levels that would be worrisome for the Fed. Citi Research expect 1y inflation expectations to remain unchanged at 2.7% but for 5-10y inflation expectations to decline modestly to 2.9% from 3.0% in the November preliminary report.

Europe and UK – BoE, Riksbank and Norges Bank meetings in focus this week

• GBP: BoE policy meeting — recent news on fiscal policy will likely further weigh on any dovish impetus on the part of the MPC. Citi Research expect the meeting this week to deliver a second 25bps cut, most likely by a 7-2 margin, but material changes to near-term guidance and scenario-based approach seems unlikely. Instead, Citi Research expect the committee to continue to re-affirm the ongoing need for re-assurance on price and wage dynamics before easing further. The fiscal package likely adds to the sense that the MPC can afford to take its time. However, this is unlikely to affect the overall direction of travel on rates – which remains geared towards loosening. Bank Rate – Citi Forecast 4.75%, Consensus 4.75%, Prior 5.0% (7-2 backing for a cut).
   
• SEK, NOK: Scandies policy rate decisions — both the Riksbank and Norges Bank will hold policy meetings this week. Citi Research expect a clear dovish message from the Riksbank - an acceleration to 50bp rate cut to 2.75% is still the base case for this meeting. In contrast, the Norges Bank is likely to stay on hold at a peak rate of 4.50%, but with a softer guidance opening the door to a December cut. Sweden CPIF Inflation, October – Citi Forecast 1.1%YY, Consensus 1.4% Y, Prior 1.1% YY; Riksbank Policy Rate – Citi Forecast 2.75%, Consensus 2.75%, Prior 3.25% (accelerating rate-cutting cycle); Norges Bank Policy Rate – Citi Forecast 4.50%, Consensus 4.50%, Prior 4.50% (hinting to December first rate cut?).

Japan – Real household spending data in focus this week

• JPY: Real Household Spending, (two-or-more-person households) (September) – Citi Forecast -2.4% YoY, Prior -1.9 % YoY - real spending of all households (consisting of two people or more) probably decreased 2.4% YoY in September after a 1.9% YoY drop in August. On a MoM basis, Citi Research pencil in a 0.5% decline in September after a 2.0% increase in August. Consumers stocked up on food and emergency supplies following the Nankai Trough earthquake alert in August, but this likely dropped off in September. Meanwhile, spending on services likely rebounded in September as the negative impact of weather/disaster factors in August dropped off. While private consumption may be weaker than expected in Q3’24, improving income conditions will likely support a rebound in Q4. Citi Research expect the BoJ to hike rates in December.

Commodity Bloc – Australia’s RBA board meeting, NZ Q3 labor force data, BoC Minutes and the Canadian October jobs report in focus this week

• AUD: RBA Board meeting: Citi RBA Cash Rate Target forecast; 4.35%, Previous; 4.35% - activity data since the last RBA Board meeting in September has generally surprised on the upside (domestic jobs data plus sticky services price inflation). So, with underlying inflation in-line with RBA’s SMP forecast, but the labor market performing better than expected, there is no reason for the RBA Board to change its messaging that it is not ruling anything in, or out. Thus, the neutral-hawkish bias should persist in the November SMP. Given that the data won’t let the RBA pivot in November, Citi Research now see risks of the cutting cycle getting delayed further. For now, the base case remains for a 25bp cut in February, but if the labor market data remains persistently strong, Citi Research could shift that view towards May. Regardless, the RBA is likely to deliver just 3 rate cuts next year for a terminal rate of 3.6% though with risks squarely towards a higher terminal and delayed rate cutting cycle.
   
• NZD: NZ Q3 Labor Force and Private Sector Wages; Citi QoQ Employment change forecast; -0.8%, Previous; 0.4%; Citi QoQ Unemployment Rate forecast; 5.1%, Previous; 4.6%; Citi QoQ Participation Rate forecast; 71.3%, Previous; 71.7%; Citi Private Sector Wages forecast; 0.5%, Previous; 0.9% - the NZ unemployment rate has slowly increased since the end of last year’s 4.0% to reach 4.6% in Q2. Citi Research expect an acceleration to 5.1% in Q3, the highest unemployment rate since Q3’20 from the lagged impact of highly restrictive policy rates and public sector job cuts. For this to occur, employment will likely fall by 0.8% in the quarter, taking the number employed back to the level before Q2’23. Support for this view comes from declining monthly jobs filled data and weaker QSBO hiring trends. With respect to private sector wages growth, this is likely to slow after persistent strong growth since the middle of 2022. From a solid 0.9% in Q2, Citi Research expect Q3 private sector wage cost growth to moderate to 0.5%, slowing YoY wage cost growth from 3.6% to 3.2%. Citi Research’s labor force and wage price forecasts are weaker than the RBNZ forecasts. A weakening of the labor market ahead of the RBNZ’s forecasts would probably add more weight to Citi Research’s out of consensus view that the MPC will cut the OCR by 75bps on November 27 to 4.00%.
   
• CAD: Bank of Canada Summary of Deliberations – the summary of deliberations from the BoC’s October meeting, when officials lowered rates by 50bp, should reflect a committee more confident that the upside risks to inflation have diminished. While still acknowledging that upside risks remain from sectors like housing, headline CPI having returned to 2%, allows for a faster return towards at least a neutral policy setting and guidance that rate cuts will continue. A dovish hint could be an indication that further large cuts could be warranted if activity and inflation evolve softer than current forecasts. Citi Research continue to think that BoC growth forecasts are overly optimistic and softer activity will be a key reason for returning rates at least to 2.75% (midpoint of neutral) over the next two meetings.
   
• CAD: Canada Net Change in Employment (Oct) – Citi: 0k, median: 30k, prior: 46.7k; Unemployment Rate – Citi: 6.7%, median: 6.6%, prior: 6.5%; Hourly Wage Rate Permanent Employees – Citi: 4.5%, median: NA, prior: 4.5% - after a solid 46.7k increase in employment in September, Citi Research expect employment levels close to unchanged in October, reflecting continued softening in demand for workers. With weaker employment in October, Citi Research expect the unemployment rate to rebound to 6.7%. Wage growth remains elevated but has slowed somewhat and should remain at 4.5%YoY in October. Citi Research expect softer activity with weak hours worked last month leading us to see downside risks to Statistics Canada’s preliminary estimate for a strong end to Q3 with 0.3% growth in September. Another soft employment report would help solidify another 50bp cut from the BoC in December, but there will still be another employment report and a CPI release before December that will matter as well.

Asia EM – China’s trade and inflation data for October in focus this week

• CNH: China Exports (%YoY) October – Citi Forecast 4.5, Prior 2.4; Imports (%YoY) – Citi Forecast -0.5, Prior 0.3; Trade Balance (USD $bn) – Citi Forecast 69.3, Prior 81.71; Foreign Reserves (USD $bn) – Citi Forecast 3290, Prior 3316 - China’s PMI sub-indices for new export orders edged down -0.2pp in October ahead of the US elections. China’s composite shipping cost index fell by another-16.6% in the first three weeks, despite shipping price from Shanghai and Ningbo having already shifted from falling to rising. As a leading indicator, Korea’s 20D export saw broadness weakness and slowed to -2.9%YoY. Citi Research see more external headwinds, as the EU voted for tariff hikes on China’s EV in October and both US and EU flash manufacturing. PMI remained in contractionary territory.
   
• CNH: China CPI (%YoY) October – Citi Forecast 0.3, Prior 0.4; PPI (%YoY) – Citi Forecast -2.5, Prior -2.8 - for CPI, the boost from food prices could be much smaller. Pork prices dropped -6.8%MoM and vegetable price declined -6.2%MoM. Non-food prices may struggle to recover as well. Earlier Singles Day Sales could drive goods prices lower, while services prices could also have a post-holiday dip. Core CPI inflation is at the risk of falling into the negative territory for the first time since early-2021. PPI deflation could also ease marginally with commodity prices recovering. The prices subindices in the PMI survey showed a rebound in industrial prices. The rebound could be divergent, with domestically oriented prices stronger.