Macro/FX Watch: Yields could be highly sensitive to non-farm payrolls

NFP Preview: Hot as JOLTS or cool as ADP?

Despite some respite, risks around the selloff in the US Treasuries continue to dominate markets. Labor market data remains heavily in focus this week and Treasury yields are showing an increasing sensitivity to that. 10-year yields jumped 7bps to 4.74% after Tuesday’s JOLTS data showed job openings were higher than expected, but slid 5bps on the release of ADP data yesterday which showed headline job growth fell below expectations. Given the volatility around JOLTS and the lack of ability of ADP to predict NFP, it is surprising that bond markets have been reacting sharply to these releases, and sets the stage for a potentially significant reaction on Friday’s jobs report as well.

US non-farm payroll report usually contains a number of significant releases, as discussed in this primer. With disinflation in progress, market will likely focus a lot more on headline job growth and the unemployment rate rather than the average hourly earnings, or the wage growth. The job market is weakening, although the pace remains modest for now. Job growth potentially remained supported in the last few month amid anticipated summer travel demand and the demand from concert tours. September data may show that the labor market cooled following the summer demand bump. However, if the headline remains strong, further drilling may be needed. Gains will have to be spread across sectors to send any signals that the job market may be re-heating, which remains unlikely in our view. Signals from ISM services, particularly the new orders component, also suggest that the US economy may be on a weaker footing from here.

The other key number of watch out for will be the participation rate, which has been rising since the pandemic-lows, and saw gains to 62.8% in August from 62.6% prior. As household budgets get stretched and credit cards get maxed out, more of the voluntary retirees could be looking to return to labor force. Jump in participation rate could help to boost the headline job growth while also potentially lowering the unemployment rate, but this can be a misleading sign. In addition, the effect of UAW strikes may not show up in the jobs report yet, but remains a drag for Q4.

Antipodeans: Growth divergence in focus

Both the RBA and RBNZ meetings this week ended in no changes to cash rate and continuation of the data-dependent mode. The tone from Australia’s new governor, Michele Bullock, was one of conviction that inflation will return to target. Australia’s economy is also losing stream, with retail sales plunging and consumer confidence taking a hit as labor market cools. Meanwhile, China story continues to remain underwhelming, providing little comfort for AUD. As global risk sentiment takes a hit, either because of the rapid sell-off in bond markets, or due to the concerns around the fallout from the high real rates, there remain little reasons to be optimistic on AUD in the short-run. Headline inflation could, however, see a bump higher due to the gasoline prices and the quarterly print due at the end of October could see some additional pricing for the RBA rate hike, but global sentiment will likely remain more of a factor.

RBNZ statement was also less hawkish than expected, and the bar for an additional rate hike will likely remain high. However, higher-for-longer could stick longer for the RBNZ compared to RBA, given NZ’s Q2 GDP witnessed a strong expansion. Terms of trade comparison between the antipodean currencies is shown in the chart below, and also suggests that improving NZ terms of trade could be a positive for NZD vs. other commodity currencies.

Elections are being held in NZ on October 14, which can bring some volatility for NZD. The opposition National Party seems to be leading the polls, which could be a positive for NZD if a clear or coalition government could be formed.

Market Takeaway: Growth differentials could bring further downside in AUDNZD to test 1.0650 or go further down to May lows of 1.0560. If oil prices go lower, NZDCAD or NZDNOK could also be prone to more upside.