Pre shutdown Jobs Smackdown

The reaction in currency and bond markets to the US September jobs report highlights traders’ lack of faith with the unemployment rate data, which showed a decline to 7.2% –the lowest since November 2008.

Markets focused on the double whammy of weaker than expected figures in non-farm payrolls (148K from 193K) and in private payrolls (126K from 161k). The 3-month average of NFP fell to 148K, the lowest since August 2012.

Another 35-year low in the labor force participation rate — 63.2%– highlights the lack of continuity of those entering the labor force.

The relevance of the September jobs report reflects the fact that it was released prior to disruption of the government shutdown, but its relevance in predicting a Fed tapering is shadowed by the time lag taken to fully reinstate furloughed government workers and the possibility of another budget and debt ceiling showdown as early as mid-January—both of which would keep any tapering off the table before Q1.

October FOMC Shutdown by Impasse

Next week’s FOMC meeting should likely provide additional USD selling as the policy statement will acknowledge the short-term nature of the solution to the budget/debt ceiling impasse as well as the renewed softness in non-farm payrolls. Considering the deal in Washington was in effect until January 15 for the govt shutdown and until February 7^th for the debt ceiling, the FOMC is unlikely to communicate optimism

Another ugly October for the US dollar

EURUSD hits fresh 23-month high at 1.3748. This would be the 5^th consecutive year when the US dollar index falls in October and the euro rises against the greenback on the same month. As Fed tapering remains off the table well into year-end, FX markets continue to shift towards risk currencies, particularly those with higher yields, whose central banks show the most credible chance of a bottom in short-term rates and a maxed out easing policy.  So far, this continues to be the Aussie as it rallies on China’s persistent data improvement.