US Open Note – Nonfarm payrolls throw cold water on dollar

Nonfarm payrolls miss forecasts

Investors were eagerly waiting for a solid 500k growth in US nonfarm payrolls in September, but the actual results caught everyone by surprise when the data showed a significantly lower addition of 194k.

Of course, there were some bright spots in the employment report as the August reading was upwardly revised and average hourly earnings strengthened faster than expected on a monthly basis. Still, the softer job creation was enough to witness the persisting labor shortages and signal that the decline in the unemployment rate, which retreated to 4.8% from 5.2% previously and 5.1% expected, was probably because of a shrinking labor force. Notably, the labor force participation fell to 61.6%.

What next for the Fed?

The question that arises now is how the Fed will respond to the sluggish job growth. Policymakers have been looking for an approximately 1.6 -2.0 million addition during the months of July and August in order to back bond tapering actions as soon as November, but the data have been somewhat bleak and September’s growth is not topping this number either.

Perhaps, the Fed could adopt a more cautious tone during its next policy meeting on November 2-3. Though, with inflation spiraling dangerously, it will be a challenging task for Powell to put down its bond tapering plans. Instead, the central bank could take a more gradual approach, likely announcing softer than expected reductions.

Dollar loses momentum; Treasury yields rebound

The dollar decelerated in the aftermath, moving against the rising Treasury yields. Euro/dollar bounced to an intra-day high of 1.1585, whilst pound/dollar rose temporarily to 1.3659 as the Bank of England sees bearish risks building in asset markets according to its quarterly Financial Policy Summary.

Dollar/yen took a step back, only to run closer to the 112.00 level. Since the Bank of Japan is not expected to tighten its policy anytime soon, the greenback could still be in a more advantageous position compared to the yen.

Loonie thrives on upbeat employment data

On the other hand, the battle against the loonie seems to be a losing game for the greenback. The Bank of Canada has already started to scale back its bond purchases, and an upbeat employment report out of Canada has further brightened the outlook for the economy, lifting the loonie to a two-month high of 1.2561 per dollar.

Employment accelerated by 157.1k compared to an expansion of 65k analysts expected, keeping the unemployment rate steady at 6.5%.

Wall Street neutral

In equities, Wall Street is struggling to extend yesterday’s gains as Treasury yields rapidly erase today’s downfall. In Europe, the STOXX 600 index is set to close flat on the day, with the advance in energy stocks offsetting losses in utilities and technology shares.

Energy frenzy returns

After a small break, the energy frenzy came back to feature headlines on Friday. The Russian president stepped in on Wednesday to offer an increase in natural gas exports to Europe amid soaring energy prices and limited inventories in the region, but investors quickly suspected that Russia may first request an agreement on the controversial Nord Stream 2 gas pipeline with Germany before it lets more supplies run through its pipelines.

WTI futures hit a fresh seven-year high around the $80.00/barrel, while Brent crude is also pushing to claim new peaks, with the focus next turning to the US Baker Hughes total rig counts due for release at 17:00 GMT.

In other related news, China showed willingness to provide a helping hand to coal-fired power firms to tackle the energy crunch. Yet, with the winter season getting underway in many regions and pandemic constraints limiting deliveries, additional spikes in energy prices look inevitable in the coming months.

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