Market wrap: US dollar index closed down 0.2% - Westpac

Analysts at Westpac offered a market wrap fro Friday's close.

Key Quotes:

"Global market sentiment: US bond yields and the US dollar rose after the jobs data, but later reversed on North Korea headlines.

The monthly US payrolls report disappointed regarding jobs growth but contained surprisingly strong details. Russian media reported that North Korea is planning to test a long range missile capable of reaching the US west coast.

Interest rates: US 10yr yields rose from 2.35% to 2.40% (a three-month high) after the payrolls data, but later completely retraced amid headlines about the Russian report on North Korea. 2yr yields rose from 1.49% to 1.53% before retracing to 1.50%. Fed fund futures yields firmed slightly to price the chance of a December rate hike at 89%.

Currencies: The US dollar index closed down 0.2% on Friday, although it did make a two-month high in response to the payrolls data. EUR initially fell to 1.1670 before retracing to 1.1738. USD/JPY initially rose to 113.44 before retracing to 112.61. AUD made a three-month low at 0.7733 after the US data, but later retraced to 0.7777. NZD similarly fell to 0.7059 – a four-month low – before retracing to 0.7096. It is opening this morning slightly weaker at 0.7060, possibly in response to Saturday’s final election results which remained inconclusive. AUD/NZD rose from 1.0920 to 1.0973.

Economic Wrap

US non-farm payrolls fell 33k in September (vs +80k expected), suggesting an even larger hurricane impact than widely assumed. Beyond hurricane impacts the underlying detail is very constructive, particularly in household survey where the BLS says that storms had no “discernible effect”.

The participation rate rose a very strong +0.2ppts to 63.1%, the employment to population ratio rose from 60.1% to 60.4% - a post-recession high, and the unemployment rate fell from 4.4% to 4.2%. These are positive trends but some of the details warrant caution – the household survey shows an incredibly large 906k gain in employment (hence the big fall in the unemployment rate and the jump in the employment to population ratio). This unusually large monthly gain may result in a sharp correction next month.

Separately, average hourly earnings jumped 0.5%, but most of that is Hurricane related too – a large 1.3% jump in hourly earnings for utility workers (typical in a hurricane month) heavily distorted the headline. Moreover many low wage workers would have been temporarily unemployed because of the storms. All this can be expected to correct lower next month.

Markets took the data quite positively, presumably around the household survey detail, but many of the outcomes will probably see a sharp correction next month. That said, Fed officials were always going to look through this month’s jobs report. Despite inflation undershooting target, the Fed looks set to hike in Dec given rates remain below neutral and financial conditions remain very accommodative.

Fed speakers Kaplan and Dudley both expected the jobs data to be distorted by the hurricanes. Dudley cited easy financial conditions as one reason to tighten further. Kaplan was open-minded about a December hike, and thinks the terminal Fed funds rate should be around 2.5%. Bullard thought the jobs data wa startling, and said more data is needed before hiking in December.

On Saturday, the result of NZ’s general election was finalised, but remains inconclusive. Accounting for 422,094 special votes caused the preliminary result to change as expected: Labour and Green each picking up an extra seat, National losing two seats.

NZ First remains the monarch-maker, with major blocs National/Act (57 seats), on the centre right, and Labour/Green (54 seats), on the centre left, both shy of the 61 seat majority required to govern alone. It remains unclear which way NZ First will swing, and when it will announce its intentions."