Xe Morning Update - Your daily market wrap

Developments in markets for Monday 03 November......

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
• AUD/USD:??bases around 0.6510, pares losses to commence near 0.6540
• Fedspeak in focus following last week's FOMC amidst a divided committee
• ISM Manufacturing PMI remains in contractionary territory, prices index eases
• Day ahead: RBA to remain on hold at 3.6%, prioritising inflation over jobs

Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......

Will the Fed cut in December?
 
A key question for the market following last week's hawkish cut from the Federal Reserve and Chair Powell's non-committal to a third consecutive quarter point cut at the 10 December FOMC meeting. Given it's the first week of the month, the answer would typically come via the widely observed nonfarm payrolls data point (released on a FRI.), reporting on U.S. jobs growth. However, given the current U.S. government shutdown, which will exceed the previous longest shutdown (35 days - Trump's first term), the market will not have the opportunity to assess NFP and its influence on the near-term path for the Fed funds target rate.
 
Heightened attention will therefore be given to Wednesday's ADP Employment Change release (ADP), the payroll providers gauge of employment in the private sector. ADP is a notoriously unreliable data point given it can have a tenuous correlation to the Bureau of Labour Statistics NFP. However given the dearth of government issued labour market data, ADP assumes the role as this week's most critical data point.  
 
Reporting a loss of -32K jobs in September, the consensus forecast calls for ADP to print at+24K new jobs created in October. An in-line or downside miss would add weight to the case for a final Fed cut for the year whilst a significant upside beat could provide the impetus for the FOMC hawks to persuade the committee to maintain a 3.75-4.00% target rate into the new year.
 
The uncertainty regarding additional Fed easing has boosted the US dollar, which continues to be bid to start the new week. Prior to the conclusion of last week's 2-day FOMC meeting, the dollar index (DXY), a weighted measure of the dollar against six major currencies traded in the mid to high 98.00's. A fourth consecutive day of intraday gains has propelled DXY to within a couple of pips of the 100.00 mark, Monday's highs the best since early August.
 
Peaking in the New York morning DXY has handed back some of its gains, commencing afternoon trade around 20-pips south off its 3-month high.
 
In turn, the Australian dollar's pullback from last week's swing high near 0.6620 continues. Commencing the new week in the 0.6540's, AUD/USD traded a tight range through the Asian session and the first half of European trade. Sellers emerged through the New York morning; intraday lows marked a few pips below 0.6520. Losses have been modestly pared through the second half of U.S. trade, AUD/USD attempting to regain a foothold in the mid 0.6500's.
 
The Aussie dollar continues to sustain directionless trade, price action oscillating either side of the 0.64-0.67 range that has endured over the past 6-months. The Aussie looked poised to venture into the upper realms of the range last week, but ultimately AUD bulls were sidelined following Chair Powells hawkish FOMC presser.
 
 AUD/USD price action rebounding through 66 US cents is required to shift to sustain a more constructive technical tone. In the interim attention is fixed on the 100-day moving average, located just below 0.6540. Should the widely observed trend following indicator place a floor under this week's price action, AUD bulls will be emboldened to drive the pair back towards the 17 September year-to-date high, located a few pips below 0.6710.

US equity markets as at time of morning update release and may not represent session closing prices  

It's been a busy couple of days for Fedspeak, central bank governors sharing their thoughts following last week's 25-bps cut. One thing this is clear - currently there is a notable divergence of views within the FOMC, evidenced by a dissent in either direction at last week's meeting, the Trump appointed Governor Miran opting for a larger, 50-bps cut whilst Kansas City Fed President Jeffrey Schmid dissented in favour of no reduction. Since 1990 there have been only 5 occasions of multiple dissent.
 
At the hawkish end of the spectrum, committee members are reluctant to deliver additional monetary easing due to persistently high inflation, still running close to 1% above the Fed's 2% target. In addition the hawks believe the recent labour market softness will subside, thereby shifting policy settings to prioritise sticky inflation. Miran and other doves believe at 3.75-4.00%, the target rate remains restrictive, heightening the risk of a pronounces downturn given the state of the jobs market and softness in interest rate sensitive sectors such as housing. 
 
The next six weeks will likely see intense debate within the Fed, particularly if the government shutdown prevails. Conversely should the flow of key macroeconomic data resume, the incoming data will determine the outcome of the December FOMC.
 
For now, private data releases, such as Monday's ISM Manufacturing PMI, hold greater significance.
 
Falling from 49.1 to 48.7 (vs 49.5, expected), the ISM Manufacturing PMI recorded a factory sector that continues to contract, just one of the past nine monthly readings printing in expansionary territory (a reading above 50.0). The one positive from the report, the prices paid sub-gauge dropped below the 60.0 mark falling from an elevated 60-70 range that had persisted since February. On the jobs front the employment index at 46.0 suggests that manufacturers continue to shed jobs.
 
The more impactful ISM Services PMI is released overnight, Wednesday, following the forementioned ADP jobs data. Should the services PMI also represent softness, thereby easing concerns regarding rising inflation, the implied probability of a December cut will climb, placing downside pressure on the dollar.
 
To the day ahead, the RBA meeting is the main event, Governor Bullock and her fellow board members to maintain the cash rate at 3.60% following last week's hot September CPI report. A few weeks back market pricing had assigned a greater than 80% implied probability to a 25-bps cut…. heading into today's decision a greater than 90% outcome is assigned to no-change. Inflation remains the priority for the RBA, despite recent weakness in the labour market   - the unemployment rate reaching a 4 year high at 4.5% for September.
 
As for the Australian dollar, price action ascending  back into the mid to high 0.65's would provide some confidence the pair can regain a foothold above 66 US cents later in the week.
 
Have a productive day.
Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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