Daily Market Pulse

The labor market’s recovery shows signs of losing momentum


U.S. data on Thursday showed jobless claims remained elevated at 860,000, which means the labor market’s recovery is showing new signs of losing momentum. Unemployment benefits show that layoffs are still historically high despite summer season hiring. It's worth remembering that these figures tend to reflect economic conditions with some delay. As companies face declining demand, more will begin to let employees go, and it is expected to accelerate sooner once protections for workers at firms that took Paycheck Protection Program loans expire at the end of September. Over this week, the U.S dollar watched the majority of G10 FX experience a rather range-bound. For the most part, this movement is due to the Fed’s promise to keep rates ultra-low for a prolonged period, amid an increase in new Covid-19 cases and the upcoming U.S. presidential election. The global Covid-19 cases exceed 30M and the death toll stands at 950,941, with the U.S. topping the list with almost 200,000 fatalities, followed by Brazil (135,000) and then India (84,400). However, many health experts believe the actual number of cases and deaths is much higher than what’s been reported.


The eurozone PMI data next week will be in the spotlight. There is a high likelihood of strong PMI data, which could take the pair EUR/USD back to the same level as last week. A range in which the ECB has already stated its concern. The World Health Organization warned on Thursday of a “very serious situation” arising on the continent as Covid-19 cases surge. Spain, France, Portugal, and the Nordic countries have seen cases increase forcing regional and national governments to consider and reimplement restrictive measures such as a lockdown. It’s a consensus among market participants, that the resurgence in Covid-19 cases poses the biggest threat to the Euro zone’s economic recovery, coupled with the fact that inflation will likely be negative next year. Despite recent Brexit deal negotiations being rather dramatic, EU Chief Negotiator Michel Barnier said in Brussels on Thursday that a deal with the U.K. is still possible. The news brought a positive tone to the market, although the UK Government's consideration of the Internal Market Bill, could damage any positive foundations. 


A resurgence of Covid-19 cases across Europe, higher unemployment, and a possible new Brexit shock have been leading Sterling to trade at lower levels amid the Bank of England’s (BoE) consideration of implementing negative interest rates. Sterling lost around one percent in the last session after the BoE said it was looking more closely at how it might implement negative interest rates amid an unusually uncertain economic outlook. After its September meeting, the BoE decided to hold interest rates at 0.1% and the level of quantitative easing at £745bn, as well as indicate that it would now be in a better position to use negative interest rates as part of the economic recovery toolkit. Moreover, the Monetary Policy Committee highlighted the renewed Brexit tensions as an additional threat.


Worries about a faltering economic recovery kept investors seeking safer harbor in assets such as the Japanese yen (JPY). JPY rose overnight, shrugging off a dovish-sounding Bank of Japan to ride a softer greenback. Japan's exports declined for a sixth straight month in August as U.S.-bound shipments shrank due to a global demand slowdown from the Covid-19 pandemic, casting a shadow over the trade-led recovery from the deep recession. Dwindling exports when there is a need to drive economic recovery highlights the huge task for Yoshihide Suga. Another issue that Suga may have to cope with is that key inflation turned negative again last month. Consumer prices, excluding fresh food, fell 0.4% in August from the previous year, falling back into negative territory again after two flat months. According to economists, the situation is likely to get even worse next quarter, where they see the core consumer price index falling by an average of 0.6% after the index loses the upward support of last year's tax hike.


After five consecutive months of gains, the Loonie has struggled through the first half of September. However, the WTI crude oil market has rallied a bit over the trading session which may help CAD to slightly recover. Today, the market will keep a close eye on Canadian retail sales for July. These numbers are expected to be at +1.0% on the month, vs +23.7% in June. Bank of Canada (BoC) Senior Deputy Governor Wilkins will be leaving after her present term expires on May 1st, 2021. Her contributions have been invaluable inside the Central Bank and externally, and as of late particularly in terms of implementing the BoC’s unprecedented stimulus. Yesterday, payroll company ADP painted a bleaker picture on the labor market than government data has done previously. ADP reported that Canada’s Payrolls fell by 205,400 in August. This is the sixth straight month of decline which includes a 523,000 fall in July. 


The Mexican peso rose slightly on Thursday, after a bank holiday on Wednesday. The appreciation of the peso occurred alongside a weakening of the U.S dollar, which ended up losing 0.26%, continuing a five-session streak of losses against MXN. In the short term, the Mexican currency is benefiting from the announcement made on Wednesday by the United States Federal Reserve that it does not contemplate increases in its interest rate, at least until after 2023. Major catalyst factors in the appreciation of the peso are: (1) the weakness of the dollar in a global context and; (2) a greater foreign appetite for local assets, mainly government debt, which certainly increases the demand for local currency.


The yuan (CNY) has jumped more than 1% over this week. CNY hit its highest level against the dollar since May 2019 as the country’s economy recovers and the U.S. weakens. China’s economic recovery has been supported by the country's exports that defied the slump in global growth thanks to surging demand for face masks and other products and services linked to Covid-19. Also, China’s import data illustrates that the country is replenishing national stocks of grains and other agricultural products, mainly taking advantage of the lower commodity prices on the international market. As a result, net trade is likely to have its largest annual current account surplus relative to its GDP in 10 years, and one of the largest ever of any country relative to global GDP. This situation, if it remains in the long run, might lead to more yuan appreciation, unless there is an official intervention.


In Brazil, many analysts and market participants are still digesting the Monetary Policy Committee meeting on Wednesday. The Central Bank of Brazil (BCB) held rates steady, as widely expected, with the basic interest rate (Selic) remaining at 2% per year. The BCB also signaled that the low base interest rate should remain amid higher than previously thought inflation. The growing discontent with the Minister of Economy, Paulo Guedes, is evident. The suggestions of the economic team have been repeatedly disallowed by President Jair Bolsonaro. This indicates the risk of changes in the orientation of fiscal policy, as well as of a possible rupture in the relationship between Minister and Bolsonaro.


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