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U.S stocks closed lower on Friday as a weaker-than-expected jobs report failed to wipe out expectations of a rate hike by the Federal Reserve before the end of the year. The Dow Jones slipped by 0.15 percent, to 18,240.49, the SP500 lost 0.33 percent, to 2,153.74 and the Nasdaq Composite fell 0.27 percent, to 5,292.41. All three benchmark indexes registered the first weekly drop after three consecutive weeks of gains.
According to the Labor Department’s NFP report released on Friday, there were 156,000 jobs added in the US in September. This result was not only lower than market expectations for 172,000 new jobs added in September, but also indicated a trend towards decreasing numbers over the last four months. The unemployment rate rose to 5% from 4.9% as more Americans entered the labor market looking for work. The number of workers in the labor force surged by 444,000 last month.
Commenting on the jobs report, Cleveland Federal Reserve President Loretta Mester said that the economy is at full employment and therefore gradual rate hikes are needed. Echoing the same point of view as Cleveland Fed President Mester, Federal Reserve Vice Chairman Stanley Fischer also stated on Friday that the result was strong enough to reflect an economy that is moving ahead but not too fast to pose risks.
Prior to Friday’s Non-farm Payrolls, most of the U.S economic data released earlier in the week posted much-better-than-expected results. Institute for Supply Management (ISM) said on Monday that the purchasing managers’ index for the manufacturing sector rose to 51.5 in September from 49.4 the prior month. The reading pointed to an expansion last month after shrinking in August.
In a separate report on Wednesday, the ISM’s services index was also reported to shoot up to the highest reading in 11 months at 57.1 in September from 51.4 in August. Data on the country’s new orders for factory goods, which was also released on Wednesday by the Commerce Department added further evidence of a healthy US economy. Orders for manufactured goods rose 0.2 percent in August after a downward revision to the July data, suggesting that the manufacturing sector is gradually regaining some steam.
The greenback will remain in focus in the week ahead. The FOMC minutes from the Fed’s September meeting are scheduled to be released on Wednesday. U.S. retail sales and University of Michigan Consumer Sentiment index are also on the calendar, and due to be released on Friday. Furthermore, U.S. policymakers including FED President Janet Yellen and FOMC Vice Chairman William Dudley are scheduled to speak in the coming week. The main focus will be on Yellen – who is scheduled to speak at the Boston Annual Research Conference on Friday.
Another major source of market guidance for the next four weeks until November 8th, shall be the US quarterly earnings season. This earnings season becomes even more critical given that it is coinciding with the final leg of the US presidential election season. A batch of big names including Alcoa, Citigroup and JPMorgan Chase report results in the coming week. Prior to the release of these earnings reports, the second 90-minute-long presidential debate between Democrat Hillary Clinton and Republican Donald Trump will take place at 9 pm Eastern shall become the focus of attention on Sunday night.
Over in the UK, the Sterling plunged to around $1.20000 in early Asian trade on Friday after French President Francois Hollande stated that the U.K had to suffer the consequences of a departure from the single market, otherwise, other countries would follow Britain and attempt to leave the EU.
Explaining the free-fall in the market, traders supposed that it was largely due to computer-driven orders that triggered and exacerbated the plunge, especially when the market was in a period of low liquidity. No matter what the cause, sterling recorded the biggest weekly loss versus the U.S dollar, among major currencies, and the steepest one-day decline since the June referendum.
The British Pound had continued to tick lower since the start of last week, following comments by Prime Minister Theresa May that she would begin the two-year period of exit negotiations by the end of March. A fall in the Cable boosted U.K’s FTSE 100 index to surpass the 7000.00 threshold as a weaker currency tends to support exporters which account for a large part of the index.
Under downward pressure from the uncertainty tied to the departure of the U.K from the European Union, the Pound could not find support from encouraging economic data that reflected an expansion in all three core sectors – manufacturing, construction and services. Economists claimed that consequences of the hard “exit” are yet to come, as the U.K is expected to experience a tough negotiation process with the EU vis-a-vis its departure from the bloc. In the week ahead, there is no important data on the U.K economy that could cause any significant data driven moves in the GBP.
Out on the mainland, the Euro ended higher against the dollar on Friday, but finished the week in the red. Bloomberg reported on Tuesday that the ECB will probably gradually taper down the asset-buying program before the conclusion of its quantitative easing program. That triggered a jump in EURUSD but the effect did not last long as the European Central Bank President Mario Draghi was quick to deny the statement. Draghi said that there had not been such discussion within the ECB. The next policy meeting of the ECB is scheduled to be held on September 20th.
German ZEW Economic Sentiment for October is the highlight of the upcoming week. Economists expect a rebound to 4.2 point after three months in a row that the number has disappointed markets.
Moving onto Canada, the USDCAD rose strongly in the past week despite rising oil prices and strong Canadian jobs data. According to Statistics Canada, more than 67k jobs were created in September, the largest increase since April 2012. The unemployment rate was unchanged at 7.0%, as more people participated in the labor market, boosting the participation rate to 65.7%.
As stated by the Richard Ivey School of Business’s report, manufacturing activity also accelerated with the IVEY PMI index jumping to 58.4 from 52.3, the highest level since January. Considering these reports, the weakness in the Canadian dollar is considered to have resulted partly from the fall in oil prices on Friday, but was mostly due to the strength of the U.S dollar even after the weaker than expected payrolls report. With no Canadian economic reports scheduled for release next week, CAD flows will dictated by oil.
Out in Australia, The RBA, led by new Governor Philip Lowe, maintained the benchmark rate at an unchanged level, at a record-low of 1.5 percent at its monetary policy meeting in the early part of last week. The bank cited an unexpected rebound in commodity prices as a boost to the economy, helping it grow at an above-average pace. Additionally, the housing boom in Australia is an area of rising concern and the real estate sector is in a situation that may not be suitable for further cuts, especially when the unemployment rate is falling and international trading conditions are favorable for Australia.
Next week is expected to be a quiet one for the AUD as there is no important data release scheduled, except the NAB Business Confidence Index on Tuesday. AUD/USD will be taking its cue from general risk appetite and the moves in the U.S dollar, as well as an increase in trading volumes as the Chinese markets reopen after a week of holiday. China’s trade balance will be out on Thursday and may have a significant impact on the AUD – given the size and significance of China-Australia trade flows.
To round up on the markets, the New Zealand dollar reversed lower in the past week, as stumbling dairy prices added pressure on the commodity dependent currency. Composite Dairy Prices fell for the first time since July at the Global Dairy Trade auction on Wednesday. The GDT price index declined by 3 percent to US$2,880, down from US$2,975 at the previous auction two weeks ago. In the coming week, the New Zealand Business manufacturing index is scheduled for release on Thursday. NZD/USD is currently forecast to remain under downward pressure.