The big theme in the week that is about to end was weakness for the dollar. This was in response to some soft US data and after Jerome Powell had watered down the Fed’s hawkish tone a little bit at the Jackson Hole Symposium. The major US data releases disappointed throughout the week, which raised doubts we will see another blowout nonfarm payrolls report. As it turned out, jobs growth did disappoint badly on Friday, which triggered further weakness in the greenback and caused precious metals to rally.
The US economy only managed to add 235K jobs in August, when 720K was expected. While this is clearly a setback, I don’t think it is a game changer insofar as the Fed’s policy is concerned. Thanks to the past sharp improvement in US jobs data, I reckon the Fed is still on course to announce the timeline for tapering QE at the November meeting. This outlook will only change if the upcoming jobs reports disappoint badly. For now, we have seen a further drop in the unemployment rate to 5.2% and wages grew more robustly at 0.6% on the months vs. 0.3% eyed.
Investors will now turn their attention to the week ahead as we head deeper into the last month of the quarter and get nearer to the business end of the year.
It is important to note that the FOMC will only have one more NFP report to work with. The next policy meeting is on November 2, but the jobs report won’t be out until two days later, on 5th of the month. So, this may mean tapering could be delayed until the December meeting – especially if we see further weakness in incoming US data or if inflation pointers weaken. In other words, there is a risk the Fed’s ‘substantial further progress’ condition won’t be satisfied to justify tapering by the Fed’s November meeting.
But in as far as the week ahead is concerned, well in light of the recent improvement in Eurozone data and some hawkish commentary from a couple of ECB officials, the EUR/USD could further extend its gains ahead of the ECB meeting later in the week, now that the US jobs report has disappointed expectations. It is also worth watching gold, now that it has cleared several resistance levels, including $1820. The weakness in the dollar could provide further fuel for the crypto rally.
Three major central bank meetings, but expect no policy changes
The week ahead features three major central bank meetings. The RBA, BoC and ECB are all expected to keep their respective policy stances unchanged.
In Canada, the upcoming federal election means the BoC won’t be making any changes but the USD/CAD could decline further as the BoC is likely to remain comparatively hawkish, and in light of the renewed strength in crude oil prices.
As far as the ECB is concerned, well I can’t image President Christine Lagarde will have changed her dovish stance much, even as some ECB members have spoken in favour of ending PEPP in early 2022 amid the strength in Eurozone data.
On Monday, the North American markets will be closed in observance of Labor Day in the US and Canada. This should make for a quitter day, although we will have further data from the Eurozone to take into account with German factory orders and Sentix investor confidence data among the highlights.
- China trade figures
- RBA – no change expected
- German industrial production and ZEW Economic Sentiment
- BOC rate decision and press conference – no change expected
- ECB policy decision and press conference
- US jobless claims, crude oil inventories
- Central bank speech: FOMC Member Daly and Williams
- UK data dump – monthly GDP, industrial production, manufacturing production and construction output numbers
- Canadian employment report
- US PPI
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