Market discounts payrolls as GBP still main story

The 33k drop in US payrolls was significantly weaker than the 80k expected, however the market was fully prepped for an outlier as a result of last month’s hurricanes. Harvey and Irma hit the metropolitan areas of Texas and Florida hard, thus the fall in payrolls is understandable.

Payrolls disguise continued strength in US labour market

In contrast to the weak payrolls number, the unemployment rate ticked down to 4.2% while weekly wages jumped sharply to 2.9% from an upwardly revised 2.7% in August. This suggests that the fundamentals of the US labour market remain strong. Other signs have also pointed to continued strength in the US labour market, including decent ISM employment readings for September and only a slight uptick in initial jobless claims. This suggests to us that payrolls will bounce back in the coming months, and today’s payrolls figure will not hinder the Federal Reserve from hiking interest rates in December.

Labour market report spurs next leg higher in dollar

This is one reason why the dollar has rallied post the data release to a near 2-month high above 94.00, and US 10-year yields have risen to 2.38%, their highest level since July. The FX and bond market haven’t been detracted by the weather-stricken payrolls data, however, US futures markets are pointing to a weaker open for US indices as stocks take a hit from a rapidly rising dollar and 10-year yield. The strength of the reaction to this labour market report, and the willingness of the market to look through today’s weak payrolls figure, suggests that this could usher in a new leg higher for the dollar, with the potential for a return to 98.00, the highest level since June, now on the cards. Likewise, the 10-year yield is likely to target 2.6% if it can clear the 2.4% hurdle.

GBP bloodbath ongoing

Although the US labour market report has stolen the limelight this afternoon, today’s main story is the pound as it continues to fall sharply, defying some who thought that it could recover. GBPUSD is hurtling towards 1.30, validating our view that the Tories are toxic for the pound, GBP is down some 3% vs. the dollar so far this week, and it is the second weakest performer in the G10, falling furthest against the Swedish Krona and the USD, the only currency that has performed worse is the NZD.

Tories a toxic cocktail for the pound

As mentioned yesterday, the key driver of the weaker pound seems to be the politics. We had mentioned months’ ago about the prospect of some Tory members using the Party conference as a vehicle to oust Theresa May, which could keep pressure on the pound. This seems to have come to pass, with the market already pricing in the prospect of her resignation (forced or not) and the prospect of a new leader being a potential Brexiteer. God help us all if Boris ends up in number 10 by this time next week, he is unlikely to be good news for the pound, or benefit our negotiations with Europe. In fact, ousting a leader because of a coughing fit is such a nonsense no wonder the FX market is taking no chances with the pound this week.

Overall, the strength of the downside momentum in sterling suggests that the pound’s bloodbath has further to run. We have sliced through so many support levels this week that we don’t even think 1.30 is likely to hold at this stage. If May can cling to power and see off threats to her crown this weekend, then the pound has a chance of recovering next week. However, in politics, as in FX, momentum can be a powerful thing and right now momentum seems to be in favour of a new PM. We expect that there will be further stories in the press this weekend, and we wouldn’t be surprised if May does bow to internal pressure and resign, yet again another female politician unfairly berated for “health” problems allowing a buffoon to take power…