Economic Worries Escalate as Jobs Day Approaches

Disappointing services PMIs spark further concerns over the global economy; the pound prices out no-deal risk; jobs day looms large in the US

Previous Day's Market Highlights

Concerns over global growth remained at the forefront of market participants' minds on Thursday, after a dismal set of services PMIs from around the globe signalled that the ongoing manufacturing malaise may be spilling-over into other sectors of the global economy. Kicking off yesterday's data slate came PMI figures from the eurozone, where the services index slid to 51.6, signifying the weakest pace of expansion since the start of the year. The reading also points to economic stagnation into the end of the third quarter, with momentum weakening heading into the final three months of the year. The euro, however, was largely unfazed by the release, presumably due to a significant degree of negative economic surprises having already been priced into the common currency, though fiscal stimulus remains urgently needed to turnaround the bloc's fortunes. 

The services slowdown continued in the UK, where the PMI tumbled to 49.5, reading below the crucial 50.0 boundary between expansion and contraction for just the 5th time in the past 10 years. However, while all 3 PMIs (manufacturing, construction and services) printed below 50 in September, the UK economy is likely to avoid a 2nd straight contraction in Q3, thus avoiding a technical recession, with the surveys having been historically poor at measuring the impact of pre-Brexit stockpiling. Speaking of Brexit, reaction to PM Johnson's proposals to replace the Irish backstop continued on Thursday. The proposals seem to have resulted in almost the exact opposite situation to that which presented Theresa May; a majority in Parliament, with the ERG & DUP set to vote in favour of the deal, but the EU sounding downbeat on the prospects of the proposals leading to serious negotiations. For the pound, markets seem to have become a tad more optimistic that a no-deal exit will be avoided, as shown by moderately lower levels of volatility in the options market. Over the course of the day, the pound gained 0.4% against the dollar, and 0.3% against the euro.

Across the pond, data from the non-manufacturing sector also disappointed, with the ISM activity gauge tumbling to a three-year low at 52.6, below even the most pessimistic of expectations. Survey respondents largely cited trade-related uncertainties as the primary cause of a slowdown in the sector, though concerns were also raised over more lacklustre than expected demand. When combined with Tuesday's manufacturing activity gauge, the data points to a sharper than expected slowdown in the US economy, heightening the chances of additional policy loosening from the Federal Reserve. As such, the odds on a 25bps cut in October now stand at 88%, almost 40% higher than this time last week, indicating how sharply sentiment towards the US economy has shifted. The increased concern over US economic health dragged the dollar lower, with the greenback settling down 0.2% against a basket of peers, a 3rd straight daily decline.

Elsewhere, somewhat surprisingly, the antipodeans were Thursday's best performers, with both the Aussie and Kiwi dollars adding more than 0.5%. Despite usually striking a softer tone when markets become increasingly risk-averse, both currencies' relative isolation from Brexit and ongoing US Presidential impeachment headlines increased their attraction. In contrast, the Canadian dollar settled a touch lower, in line with a decline in oil prices; while both the Japanese yen and Swiss franc were relatively subdued.

Away from FX, equity markets held firm, despite rising concerns over the health of the global economy. In Europe, the pan-continental Stoxx 600 closed unchanged, while the US benchmark S&P 500 closed 0.8% higher. The S&P's rally came due to the market focusing on the increasing prospects of looser monetary policy, rather than the state of the economy; a state that surely won't continue should data deteriorate. Finally, oil prices were subdued; global benchmark Brent settled unchanged, while US WTI crude dipped 0.35%.Concerns over global growth remained at the forefront of market participants' minds on Thursday, after a dismal set of services PMIs from around the globe signalled that the ongoing manufacturing malaise may be spilling-over into other sectors of the global economy. Kicking off yesterday's data slate came PMI figures from the eurozone, where the services index slid to 51.6, signifying the weakest pace of expansion since the start of the year. The reading also points to economic stagnation into the end of the third quarter, with momentum weakening heading into the final three months of the year. The euro, however, was largely unfazed by the release, presumably due to a significant degree of negative economic surprises having already been priced into the common currency, though fiscal stimulus remains urgently needed to turnaround the bloc's fortunes. 

The services slowdown continued in the UK, where the PMI tumbled to 49.5, reading below the crucial 50.0 boundary between expansion and contraction for just the 5th time in the past 10 years. However, while all 3 PMIs (manufacturing, construction and services) printed below 50 in September, the UK economy is likely to avoid a 2nd straight contraction in Q3, thus avoiding a technical recession, with the surveys having been historically poor at measuring the impact of pre-Brexit stockpiling. Speaking of Brexit, reaction to PM Johnson's proposals to replace the Irish backstop continued on Thursday. The proposals seem to have resulted in almost the exact opposite situation to that which presented Theresa May; a majority in Parliament, with the ERG & DUP set to vote in favour of the deal, but the EU sounding downbeat on the prospects of the proposals leading to serious negotiations. For the pound, markets seem to have become a tad more optimistic that a no-deal exit will be avoided, as shown by moderately lower levels of volatility in the options market. Over the course of the day, the pound gained 0.4% against the dollar, and 0.3% against the euro.

Across the pond, data from the non-manufacturing sector also disappointed, with the ISM activity gauge tumbling to a three-year low at 52.6, below even the most pessimistic of expectations. Survey respondents largely cited trade-related uncertainties as the primary cause of a slowdown in the sector, though concerns were also raised over more lacklustre than expected demand. When combined with Tuesday's manufacturing activity gauge, the data points to a sharper than expected slowdown in the US economy, heightening the chances of additional policy loosening from the Federal Reserve. As such, the odds on a 25bps cut in October now stand at 88%, almost 40% higher than this time last week, indicating how sharply sentiment towards the US economy has shifted. The increased concern over US economic health dragged the dollar lower, with the greenback settling down 0.2% against a basket of peers, a 3rd straight daily decline.

Elsewhere, somewhat surprisingly, the antipodeans were Thursday's best performers, with both the Aussie and Kiwi dollars adding more than 0.5%. Despite usually striking a softer tone when markets become increasingly risk-averse, both currencies' relative isolation from Brexit and ongoing US Presidential impeachment headlines increased their attraction. In contrast, the Canadian dollar settled a touch lower, in line with a decline in oil prices; while both the Japanese yen and Swiss franc were relatively subdued.

Away from FX, equity markets held firm, despite rising concerns over the health of the global economy. In Europe, the pan-continental Stoxx 600 closed unchanged, while the US benchmark S&P 500 closed 0.8% higher. The S&P's rally came due to the market focusing on the increasing prospects of looser monetary policy, rather than the state of the economy; a state that surely won't continue should data deteriorate. Finally, oil prices were subdued; global benchmark Brent settled unchanged, while US WTI crude dipped 0.35%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1250 1.1381 1.1092 2.54%
GBP/USD 1.2345 1.2583 1.2233 2.78%
EUR/USD 1.0970 1.1110 1.0879 2.08%
GBP/AUD 1.8275 1.8496 1.7937 3.02%
GBP/NZD 1.9520 2.0003 1.9113 4.45%
GBP/CAD 1.6455 1.6691 1.6105 3.51%

Today's Market Highlights

As always, the first Friday of the month means only one thing for financial markets - jobs day. The monthly US labour market report will be released this afternoon, recording the employment situation in September. Headline nonfarm payrolls are expected to remain subdued after a disappointing August, with a consensus estimate for the US economy to have added 145,000 jobs last month, just below the 3-month average of 156,000. Indicators leading up to the payrolls report have, however, been softer than expected; the ADP employment report points to just 135,000 jobs being added, while the employment components of the ISM manufacturing and non-manufacturing indices fell significantly short of expectations. Nonetheless, the likely continued moderation in payrolls is due to ongoing supply constraints in the late-cycle US economy, rather than a decrease in labour demand, with a shrinking pool of available labour to fill open positions, which remain close to a record high. As always, in addition to September's jobs number, revisions to the previous two months' data will be closely watched in case of any surprises.

Meanwhile, in addition to the headline payrolls figure, market participants will look for continued signs of labour market tightness in the unemployment rate and earnings data. Unemployment is set to remain unchanged at 3.7% for a 4th straight month, while average hourly earnings are expected to increase at 3.2% YoY, unchanged from August. Despite the ongoing imbalance between labour supply and demand, wages have failed to increase at a significant pace. One would expect earnings to be increasing at a faster rate, with a shortage of labour supply resulting in increased competition to retain staff, likely leading to increased compensation. This conundrum is, however, nothing new; with most developed economies failing to see wages significantly pick up despite tight jobs markets. For markets, a softer than expected payrolls report will likely be the final confirmation that the FOMC will look to loosen policy for the 3rd time in as many meetings at the end of October. This evening's remarks from Fed Chair Powell, due after the labour market report, will be closely watched for signs of a more aggressive pace of policy easing.

Elsewhere today, the data calendar is relatively sparsely populated, with no notable releases due from either the UK or eurozone. Today's only other notable releases come from Canada; though neither August's trade data or September's Ivey PMI are likely to be major market movers. Instead, more attention will be on a host of FOMC speakers this afternoon, including remarks from hawkish voters Rosengren and George, alongside Board Members Quarles & Brainard. Any explicit hints at looser monetary policy will likely weigh on the dollar. Meanwhile, the near-term direction of the pound will continue to be determined by Brexit-linked headlines, with choppy trading conditions likely to prevail as conflicting rumours on the state of UK-EU relations emerge.

Looking ahead to next week, the US monetary policy outlook will remain in focus, with market participants set to parse minutes from the FOMC's September meeting for signs of more accommodative policy on the horizon. The minutes will also be closely examined for any hints at the Fed looking to address ongoing issues in funding markets, possibly through the introduction of a standing repo facility or by reintroducing permanent open market operations. Also due from the US next week are September's CPI data and preliminary consumer sentiment figures for October, both key with concerns over US economic growth persisting. Meanwhile, sterling will continue to trade in line with shifts in Brexit sentiment, though Parliamentary developments may be lacking next week, with Parliament set to be prorogued from for 5 days from Tuesday, in preparation for a Queen's Speech. Elsewhere, minutes from the ECB's September meeting will be eyed for further signs of disagreement among Governing Council members over the scope of the sweeping stimulus package announced last month. Also in focus will be labour market figures from Canada, expected to show the jobs market remaining tight. 

Today's Economic Calendar

Time Currency Release Consensus Previous
13.30pm USD Nonfarm Payrolls (Sep) 145k 130k
13.30pm USD Average Hourly Earnings (YoY - Sep) 3.2% 3.2%
13.30pm USD Average Hourly Earnings (MoM - Sep) 0.3% 0.4%
13.30pm USD Unemployment Rate (Sep) 3.7% 3.7%
19.00pm USD Fed Chair Powell Speech