The market discourse this week has centred on whether we’ve reached the peak level of hawkishness from the Fed. With the ISM manufacturing and JOLTs data providing conflicting messages to the ISM services and ADP employment report, the emphasis was very much placed on today’s payrolls report to settle the argument, at least until next week’s CPI report is published.
The payrolls report wholeheartedly sided with the hawks within the US rates space and endorsed the message by Fed speakers this week that further tightening is to be expected heading into 2023. Net employment printed at a healthy rate of +263K, with job gains consistent across all sectors–healthcare (+60K), services (+46K), manufacturing (+22K), and construction (+19K)–while the participation rate fell slightly to 62.3%. Both higher employment and lower participation resulted in the unemployment rate falling back down to the pre-pandemic all-time low of 3.5%. The only saving grace for those calling for the peak in the Fed’s hawkishness was the wage growth data, which printed at 0.3% MoM, or alternatively an annualised rate of 3.6%–a level that doesn’t necessarily scream wage-price spiral. Nonetheless, we think today’s labour market data keeps the Fed on track to hike by a further 125bps this year, although we note that downside risks to this view are building.
In response to the data release, the 2-year Treasury yield jumped by 5.6bps to 4.3%, swap pricing rallied to imply a year-end rate of 4.35%, and the dollar DXY index rallied to a fresh high on the week.
The dollar’s gains across the G10 space weren’t evenly distributed, however. The dollar surged against currencies with either weak fundamentals, such as EUR and GBP, along with currencies that have outperformed this week, like NZD. Comparatively, the market still seems wary over BoJ intervention as the spike in the US 10-year yield failed to send USDJPY much higher above the 145 level in fear of it sparking fresh intervention.
In contrast to the Nonfarms data out of the US, the labour market data out of Canada for September was less compelling.
Net employment exceeded expectations by just 1.1K at 21.1K, wage growth fell from 5.6% to 5.2%, and the participation rate moderated only slightly to 64.7%, which is much closer to pre-pandemic levels than the US and thus implies less wage pressures going forward. In this regard, today’s labour force survey data out of Canada neither rebuked or wholeheartedly endorsed Governor Macklem’s hawkish commentary at yesterday’s Halifax Chamber of Commerce event. Nonetheless, the fact that the level employment has stopped declining after three consecutive months of contraction suggests resistance to higher Canadian bond yields should lessen. This should limit downside pressure in the USDCAD rate for the time being, but we expect a widening of front-end interest rate differentials to continue to support a higher USDCAD over the course of Q4.
Broad dollar spikes higher after strong payrolls report
Simon Harvey, Head of FX Analysis