US Payroll Data in Focus as Markets Eye Fed’s Next Move
Throughout the week, U.S. data provided mixed signals about the economy, while growing expectations that the Federal Reserve will take a less aggressive path in cutting interest rates helped the U.S. dollar continue to strengthen. Markets are focused on today’s payroll and unemployment data, which are expected to show that the labor market is cooling more slowly than initially thought, in search of further clues.
After Tuesday's data reporting a contraction in manufacturing activity, yesterday's services sector data showed that the U.S. services index recorded the fastest expansion since February 2023 in September, driven by rising orders and stronger business activity. The services purchasing managers index rose 3.4 points to 54.9 last month, exceeding the market expectation of 51.7. New orders reached their highest level since the beginning of 2023, but the increase in demand also led to increased prices.
On the other hand, as highlighted by the manufacturing sector data, the employment index of the services sector also declined. The services employment indicator fell from 50.2 to 48.1, signaling that service providers are resigning from hiring.
This week's labor market data from the U.S. commonly indicated that while layoffs have not increased significantly, new hires have slowed. Yesterday's unemployment claims report also confirmed that layoffs remained limited.
Initial claims for the week ending September 27 rose by 6,000 from the previous week, coming in at 225,000. This modestly deviated from Bloomberg’s economist survey median forecast of 221,000. However, it aligned closely with the four-week average, which reflects the lowest level since June at 224,000.
Additionally, continuing claims, which reflect the number of people receiving unemployment benefits, remained virtually unchanged from the previous week at 1.83 million. These figures confirm that while American workers may find it harder to secure new jobs, the increase in layoffs is far from critical.
Some economists attribute the limited rise in unemployment claims to Hurricane Helene, which significantly impacted several states. Last week, worker offices in the hurricane-affected regions were closed, and people were preoccupied with storm recovery, which may have prevented some claims from being filed. Additionally, economists warn that claims could rise in the coming weeks, accounting for those who lost jobs due to the storm.
Meanwhile, the dock workers' strike that affected U.S. East Coast and Gulf ports added a new layer of concern regarding labor market risks. The strike, which could have reduced October payrolls by 80,000 and increased unemployment claims if it had continued for more than two weeks, has ended. Workers still negotiating a new contract with their employers will return to their jobs today.
Additionally, while some large companies have announced workforce reduction plans recently, some retail companies report higher hiring numbers before the holiday season. Online retailer Amazon has announced that it is hiring 250,000 people in the U.S. In addition, Challenger, Gray & Christmas Inc. estimates that retailers will add 520,000 jobs in the last quarter of the year. Although these hiring figures are about 8% lower than the same period last year, they are likely to slow down the cooling of the labor market.
While these forecasts may slightly ease concerns about the labor market's future, today's data will likely shape expectations for the Fed’s next move by offering a clearer picture of the current state. Economists predict that the data will show a recovery in payroll growth and stable unemployment, which could alleviate persistent concerns about weakening labor demand.
At the November meeting, markets continue to price in a one-third chance of a half-point rate cut. However, if payroll data aligns with market expectations, pricing for a quarter-point cut as the main scenario could strengthen, supporting the U.S. dollar’s recent gains.
Gold Holds Gains Amid Rising Geopolitical Tensions and Fed Rate Cut Speculations
While the U.S. dollar and Treasury yields are rising on growing expectations of gradual Fed rate cuts, safe-haven demand triggered by escalating tensions in the Middle East is helping gold maintain its gains.
Treasury yields have reached their highest levels since early September, with the 2-year yield at 3.69% and the 10-year at 3.83%. Typically, rising yields are negative for the non-interest-bearing yellow metal. However, increasing geopolitical risks are limiting gold's downside moves.
If today's U.S. labor market data aligns with or exceeds forecasts, the U.S. dollar could strengthen, putting downward pressure on gold prices. However, unless a development reverses the current safe-haven demand, downside movements may remain limited.
In the opposite scenario, if the data fails to meet forecasts, bets that the Fed may opt for a half-point rate cut to prevent further cooling of the labor market could be fueled. This could increase pressure on the U.S. dollar and lead to gold climbing toward record levels.
Oil Prices Climb as Markets Brace for Possible Supply Disruptions from Middle East Conflict
Following Iran's missile strike on Israel and Israel's vow to retaliate, escalating tensions in the Middle East have driven crude oil prices up by around 10%, reaching their highest levels since the beginning of last month.
Markets remain on edge due to the possibility of Israel retaliating by attacking Iran’s oil facilities. Yesterday, U.S. President Joe Biden stated that the U.S. was in discussions about whether it would support possible Israeli strikes on Iran’s oil facilities. A U.S. official mentioned that the administration is continuing talks with Israel, and no decision has been made yet.
The Middle East produces about one-third of the world’s crude oil supply, with Iran alone contributing approximately 3.3 million barrels per day, making it OPEC's third-largest producer. Therefore, any potential attack on Iran’s oil facilities could significantly disrupt the global oil supply.
Economists at Citigroup estimate that a potential attack on Iran’s major facilities could take around 1.5 million barrels of supply off the market. Smaller infrastructure attacks could result in the loss of 300,000 to 450,000 barrels of production.
Although markets are currently pricing in the ongoing tensions, concerns about a full-scale war remain limited, and such a scenario has not yet been fully reflected in prices. Thus, news from the Middle East will continue to play a critical role in determining oil prices.
Ishiba’s Surprise Comments Shake Markets, Reversing Yen Gains and Cooling Rate Hike Bets
The Japanese yen appreciated by approximately 3% last week following Shigeru Ishiba's surprise election as the new Prime Minister. The main driver behind this move was the belief that Ishiba would respect the independence of the Bank of Japan (BoJ) and support the policy normalization process.
However, the new Prime Minister's unexpected warning regarding interest rate hikes reversed market expectations. After a meeting with BoJ Governor Kazuo Ueda, Ishiba, in an unusual show of transparency for a Prime Minister, stated that Japan was not yet ready for higher borrowing costs.
Ishiba's comments diminished expectations for a rate hike from the BoJ. According to futures market data, expectations for a December rate hike dropped from 29% on the Friday Ishiba was elected to 22%. Similarly, bets on a rate hike within 12 months fell from 87% to 78%.
In addition, BoJ Governor Ueda appeared to soften his hawkish stance following his meeting with Ishiba. Ueda stated that the BoJ must confirm a soft landing in the U.S. economy before further reducing stimulus.
Amid tempered rate hike expectations and the anticipation of robust U.S. employment data, the yen has fallen even lower than before Ishiba’s election. This situation triggered expectations of a weaker yen and increased carry trade transactions, which had unwound following the BoJ’s hawkish shift. If more carry trade investors bet on the possibility of USD/JPY declining toward the 150-155 levels, losses in the yen could deepen.