Sunset Market Commentary

Markets

Markets barely budged in the run up to today’s widely anticipated payrolls so we’ll jump straight to it. Job growth amounted to 187k in August. The small consensus beat (170k) fades to nothing when taking into account a net 110k downward revision for the past two months. The unemployment rate unexpectedly jumped 0.3 ppts to 3.8% but a jump in the participation rate from 62.6% to 62.8% as more Americans explore the labour market helps explain the uptick. It’s the highest level since the pandemic erupted in February 2020. Average hourly earnings growth cooled a little more than expected on a monthly basis, from 0.4% to 0.2%, bringing the yearly figure further down to 4.3% (vs 4.4% in July). It’s a decent report, yet one that shows the labour market is moving from extremely tight towards a more balanced one. After the string of other disappointing US data earlier this week (including JOLTS & consumer confidence) it strengthens the markets’ case for Fed tightening effectively having come to an end. The US manufacturing ISM is still due after wrapping up this report though. Money markets yesterday were evenly split whether one more hike will follow or not. The balance today tilts towards a just one in three chance for a final 25 bps move. They also stop short of fully pricing in two full rate cuts as soon as May 2024. The short end of the US yield curve clearly outperforms even though it has left the intraday lows behind. The 2-y yield eases 3 bps. Yields on longer maturities are much more muted. The 10-y yield briefly dipped 5 bps in the wake of the report before paring losses again and even gaining a few bps. In some parts of the curve the inversion disappears for the time being (eg. 30y-5y). German yields followed a similar steepening trend with the 2-y yield first easing a few bps before trading flat on the day and the 30-y yield adding 7 bps on a daily basis.

The dollar is only marginally weaker for the day. DXY falls towards 103.44 but steers clear from the lows seen earlier this week. EUR/USD ran higher but it could have been more given the initial yield differences. The pair is trading around 1.087. USD/JPY is testing minor support around 145. The Canadian loonie underperforms G10 peers after the northern economy unexpectedly contracted in Q2 (-0.2% q/q vs +1.2% expectations).

News & Views

The Czech Finance Ministry published its proposal for the 2024 State Budget. The proposal assumes a budget deficit of CZK 252 bln. Both revenues (CZK 1921.2 bln from 1927.9 bln, -0.3%) and expenditures (CZK 2173.2 bln from 2222.9 bln, -2.2%) are expected to decline. Earlier in the budget process, the Ministry of Finance aimed for a budget deficit of CZK 235 bln. The government for this year the Czech budget assumes a deficit of CZK 295.0 bln. The draft proposes spending cuts in regional development, in the Health Ministry and in the Industry and trade Ministry. Expenses in defense are expected to increase to meet defense spending legislation (2.0% of GDP). The composition of the budget items still might be changed due to debate within the government, but the Finance Ministry indicated that the deficit as such shouldn’t be changed anymore. The budget will be submitted to Parliament by the end of September. Other data today showed that Czech manufacturing PMI tentatively bottoming from 41.1 in July to 42.9 (40.8 bottom in June) still 15th consecutive month contraction. The krona today weakened slightly to EURCZK 24.12.

Swiss August inflation data published this morning showed somewhat of a mixed picture as markets are counting down to the September 21 SNB policy meeting. Headline inflation rose 0.2% M/M (-0.1% in July) keeping the Y/Y measure unchanged at 1.6% (vs 1.5% expected). According to the Swiss Statistical office, the “0.2% increase compared with the previous month is due to several factors including rising prices for fuels and heating oil. Housing rentals and fees for securities accounts also recorded a price increase. In contrast, the hire of private means of transport decreased as well as prices for air transport and international package holidays”. In its June forecast, the SNB expected inflation to decline to 1.7% in Q3, but to regain some ground later this year and next year. At that time the SNB kept the door open for further tightening. Money markets currently see a chance of less than 50% for the SNB to hike rates again in September. After topping out recently, the franc gained marginally to today (EUR/CHF 0.9570).