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US September jobs - low unemployment rate leaves no room for a Fed pivot

  • USD: The US economy adds 263k new jobs in September, close to consensus expectations and steadily downshifting from 315k in August and above 500k in July. Job growth though is broad-based with the unemployment rate falling back to 3.5% in September – returning to its July level after rising to 3.7% in August. This is a function of a 204k increase in household employment and a drop in the labor force participation rate from 62.4% to 62.3%. Wages also rise 0.3%MoM and 5% YoY, matching consensus but significantly lower than the Atlanta Fed Wage Tracker currently running at 6.7%YoY. Overall, the data continues to point to a historically tight US labor market though with recent JOLTS job openings data showing an unexpected drop of 1.1mln jobs, this could point to a jobs slowdown, if not in November then by year-end. That said, Friday’s jobs report leaves little room for a Fed pivot for now and is likely to see the Fed raising rates by a further 75bp in November to take the Fed Funds rate to 3.75 – 4.00%. Focus this week now shifts back to price inflation – Citi analysts expect US core CPI to come in at 0.5%MoM (refer Week Ahead).
BoC Governor Macklem remains hawkish as return to job growth does little to change Canada’s backdrop
  • CAD: In a speech earlier last week prior to the Canadian September jobs report, BoC Governor Macklem strikes a hawkish tone, saying there is “more to be done” given that domestic inflationary pressures are yet to ease. Macklem indicates that the rate hike cycle is set to continue and pushes back against a potential dovish pivot, as he says that the BoC is not ready for a “more finely balanced” rate policy yet. In reference to recent domestic inflation data, Macklem welcomes the drop in August CPI to 7.0% YoY vs 7.6% prior but does not see underlying inflationary pressures “fading away by itself” though adds that persistent inflationary pressures do not mean that higher interest rates are not working, but that it will take time. Given the hawkish rhetoric, it sets the scene for the BoC to raise rates by at least 50bps at the October 26 meeting which now looks to be almost fully discounted by markets.
  • CAD: Canadian employment rises for the first time in three months, with 21.1k jobs added in September, close to consensus for 20k and the unemployment rate also falls to 5.2% from 5.4% in August, partly as the labor force participation rate declines to 64.7%. Wage growth though is somewhat softer than expected, with hourly wages of permanent employees rising 5.2%. There are some mixed messages in the September employment report, but overall the data reaffirms a still tight labor market that will likely keep the BoC focused on raising rates further.   

UK PM Liz Truss in Prague for an entente cordiale on the Northern Ireland Protocol

  • GBP: UK PM Liz Truss attends the inaugural summit of the European Political Community and meets up with French President Macron, whom she calls “a friend”, laying out the groundwork for an entente cordiale after three years of heightened tensions. Significantly, there are more optimistic noises about possible adjustments to the Northern Ireland (NI) Protocol. Former Taoiseach Leo Varadkar concedes the NI protocol is “a little too strict”, raising hopes of further EU compromises as UK and EU hold technical talks over the protocol. Press reports suggest the two parties could soon agree on a calendar for meetings to find a mutually acceptable solution.


Week Ahead – back to US inflation watch

  • USD: US September CPI MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%; CPI YoY – Citi: 8.1%, median: 8.1%, prior: 8.3%; CPI ex Food, Energy MoM – Citi: 0.5%, median: 0.4%, prior: 0.6%; CPI ex Food, Energy YoY – Citi: 6.6%, median: 6.5%, prior: 6.3% - Citi analysts expect a continuation of the trend of still solid monthly increases. Risks are tilted slightly to the downside though due to a softening in goods prices generally over the coming months. Meanwhile, the trend of services prices, both for shelter and other services, continue to be the more important underlying drivers of inflation with Citi analysts again penciling in strong increases. 
  • USD: US September PPI Final Demand MoM – Citi: 0.3%, median: 0.2%, prior: -0.1%; PPI Final Demand YoY – Citi: 8.6%, median: 8.4%, prior: 8.7%; PPI ex Food, Energy MoM – Citi: 0.5%, median: 0.3%, prior: 0.4%; PPI ex Food, Energy YoY – Citi: 7.6%, median: 7.3%, prior: 7.3%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy, Trade Services YoY – Citi: 5.7%, median: NA, prior: 5.6% - with commodity prices falling in recent months and some easing in supply chain pressures, core goods prices in PPI should increase only modestly in September. PPI goods prices have led trends in consumer goods prices and slowing in PPI goods would further support softer goods prices in CPI in coming months.
  • USD: University of Michigan Consumer Sentiment – Citi: 58.2, median: 58.8, prior: 58.6; University of Michigan 1Yr Inflation Expectations – Citi: 4.8%, median: NA, prior: 4.7% - 1Yr inflation expectations could rise back to 4.8% from 4.7% and Citi analysts also expect the sentiment index to decrease modestly to 58.2 as inflation proves more persistent and worries about a US recession in the near to medium term continue rise.
  • GBP: UK: Is weak demand beginning to come into the labor market? – UK: Vacancies, June-August: Citi Forecast 1220k, Prior 1274k (beginning to moderate); Payroll Employees (MM Change), September: Citi Forecast 48k, Prior 73k; Employment, June-August: Citi Forecast -159k 3M/3M, Consensus 128k 3M/3M, Prior 160k 3M/3M (Participation stalled); Unemployment Rate, June-August: Citi Forecast 3.6%, Consensus 3.8%, Prior 3.8% (Short term unemployment falling); Average Weekly Earnings, June-August: Citi Forecast 5.9% 3M YY, Consensus 5.9% 3M YY, Prior 5.5% 3M YY; AWE Ex-bonus, June-August: Citi Forecast 5.4% 3M YY, Consensus 5.3% 3M YY, Prior 5.2% 3M YY (Regular pay momentum picking up); UK Monthly GDP, August: Citi Forecast 0.0%MM, Consensus 0.0% MM, prior 0.2% MM; UK GDP, 3M/3M: Citi Forecast -0.2% 3M/3M, Consensus -0.2% 3M/3M, Prior 0.0% 3M/3M (BoE Forecast for Q3: -0.1% QQ).
  • CNY: China’s Trade Balance (USD bn): Citi Research 77.9, Consensus 81.2, Prior 79.4; Exports (%YoY): Citi Forecast 4.0, Consensus 4.0, Prior 7.1; Imports (%YoY): Citi Forecast 1.0, Consensus 0.0, Prior 0.3-  exports growth could moderate to 4%YoY and imports might remain sluggish at 1%YoY — the trade surplus is likely to narrow to US$77.9bn as Citi analysts see signs of further slowing export momentum in September.