By Stuart Talman, XE currency strategist
Ahead of the week's headline event, US jobs numbers, the market has slipped into wait-and-see mode, price action across multiple asset classes trading in condensed ranges, yielding choppy sideways trade.
Risk sentiment has leaned positive this week, the market's mood modestly brightening following second tier labour market data in the US printing below consensus estimates, validating the view of a Fed that is done hiking. Week-to-date, US bond yields and the dollar are lower, equity markets advance for a second week and pro-cyclical currencies, including the New Zealand and Australian dollars, outperform.
Having surged through 60 US cents during Wednesday's overnight session, the New Zealand dollar has settled into a 0.5930/70 range through Thursday's sessions awaiting the next key directional cue which likely presents this evening, the market receiving the latest reading of the US labour market.
The headline data point: Nonfarm Payrolls has been trending down in orderly fashion over the past 18 months as the Fed's 500bps of monetary tightening starts to impact firms hiring intentions. The labour market during August is expected to have added just shy of 170K new jobs, down from July's 187K result.
The unemployment rate is projected to remain near historical lows at 3.5% whilst average hourly earnings are estimated to have grown 0.3% month-on-month.
Should these numbers surprise to the upside, the week's moves are likely to be unwound, US bond will retreat (yields rise), the dollar will point higher and sellers of US equities will wrestle back control.
Alternatively, a soft employment report increases the likelihood that Jerome Powell and his FOMC colleagues are comfortable with a Fed funds target rate at 5.25% - 5.50%, sufficiently restrictive to further cool the labour market, household spending and the broader economy, thereby exerting further downward pressure on inflation.
On the topic of inflation, the Fed's preferred inflation gauge, core personal consumption expenditures was released overnight printing at 0.2% MoM and 4.2% annualised, in line with expectations. Whilst a 0.2% MoM result is encouraging, inflation is still yet to decline as quickly as the Fed desires, the 4.2% July result an uptick from June's 4.1%.
Core PCE peaked at 5.4% in March 2022…..the speed of the pullback from cycle highs has notably slowed through 2023.
Like the PCE release, the data flow over the past 24 hours has mostly printed in-line with consensus estimates.
Firstly, within region, China PMIs were in focus during Thursday's local session. Activity data for the world's second largest economy has been horrendous of late, representative of an economy that has failed to re-ignite following the abandonment of covid-zero 9 months ago.
August PMIs brought a little relief, the official NBS Manufacturing PMI rising from 49.3 to 49.7 (vs 49.4, expected), suggesting that the underwhelming stimulus measures rolled out by the state in recent months is modestly reviving factory activity. It was the highest reading in 5 months.
Unlike the manufacturing sector, non-manufacturing (includes services and construction) remains in expansionary territory (51.0 vs 51.1, expected), but worryingly continues to trend lower, nearing the 50.0 mark that defines expansionary versus contractionary activity levels. The softest reading since December, the non-manufacturing PMI has logged six consecutive months of declines.
The Kiwi was mildly bid following the PMI releases.
Through European trade, the focus was August CPI data: the core harmonized index of consumer prices printing at 0.3% MoM, yielding an annualised rate at 5.3%, down from 5.5% in June. Also printing at 5.3% (vs 5.1%, expected), headline inflation matched June's reading, likely causing a little concern for the ECB given inflation is still running at 2.5x above target.
The ECB next meets on 14 September. Market pricing for another 25bps hike dropped following the eurozone CPI release, assigning a 1-in-3 implied probability the deposit facility rate is lifted to 4%.
Given the recent run of poor macroeconomic data flow, the falling odds suggests stagflation concerns are rising - the market adopting the view that the ECB likely won't add further tightening given the eurozone economy is headed towards a period of significantly weaker growth.
Although, ECB minutes from the July meeting (also released THURS.) record that President Lagarde and her governing council members subscribe to the view that conquering inflation must take priority over weakening growth.
The euro was a noted laggard through Thursday, falling around three-quarters-of-a percent against the dollar, whilst the Kiwi firmed by a similar magnitude against the EUR.
Bouncing from the 0.5440's, NZDEUR approaches the upper bound of a 0.5450 - 0.5500 range that has contained much of the past seven trading days price action. A topside break through here adds weight to the case that the pair has formed a short term bottom at the 21 August low near 0.5420, also a 3+ year low.
Looking to the final trading day of the week, the market's attention will be squarely on the previously mentioned US jobs report. Whilst the US session also delivers the ISM Manufacturing PMI, this data point typically induces a smaller market reaction relative to the ISM Services PMI…..and will take a back seat given it's all about nonfarm payrolls.
Should the Kiwi advance through 60 US cents following soft jobs numbers, we back the basing call with higher conviction, the recent lows in the 0.5880's expected to hold. Conversely an upside beat in jobs growth and/or a hot average hourly earnings number, NZDUSD could be making fresh lows, next week.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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