US Benchmark Payroll Revisions Over-Hyped? Dollar may Benefit from Buying on Fact after Being Sold on Rumors

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Marc Chandler
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Overview: The preliminary annual revision to US jobs growth is front and center today. It has gotten more play that usual, amid speculation of a historically large revision. Yet, the direct impact on policy may be minimal. Federal Reserve officials, including Chair Powell, acknowledged that the payroll growth may have been overstated. Moreover, the Fed's judgment of the labor market is not based on one element of the multidimensional labor market. Indeed, given the extent of the dollar's slump in recent days, "sell the rumor, buy the fact" type of activity could unfold. The dollar is trading with a firmer bias against most of the G10 currencies today. The Canadian dollar is the only one posting upticks, albeit minor. Among emerging market currencies, the Mexican peso, which has been among the worst performers in recent days, lead the few EM currencies that are gaining on the greenback today. 

Equities are mixed today. China, Japan, Hong Kong, and South Korea saw equities slip. Walmart's sale of its stake in China's JD.com weighed China's tech sector. Europe's Stoxx 600 is up around 0.25% after yesterday's 0.45% decline snapped a five-day advance. US index futures are narrowly mixed. 10-year bond yields are little changed in Europe, while the 10-year US Treasury yield is firmer, slightly above 3.81%. The two-year US yield is a little firmer at 4.0%. Gold is consolidating in yesterday's range and is holding above $2500. October WTI is also consolidating and is threatening to end a three-day, 5% fall. 

Asia Pacific

It was a relatively quiet local session. The main feature was Japan's July trade figures. June's JPY224 bln surplus gave way to a JPY622 bln shortfall in July. Despite the under-valued yen, Japan's current account surplus is driven by income earned on foreign investments not trade. Exports rose 10.3% year-over-year in July, which are flattered by the base effect. In July 2023, exports had fallen by 0.3% year-over-year. Imports surged 16.6% year-over-year, the most since January 2023. In July 2023, imports had fallen a little more than 14% year-over-year. Tomorrow, Japan, and Australia see the flash August PMI and the MOF reports weekly portfolio flows.

The dollar held slightly below the (38.2%) retracement objective of the losses since the multi-year high (~JPY162) at the end of last week near JPY149.45. After finishing poorly yesterday, it was sold briefly through JPY145 today before recovering to about JPY146.20. Nearby resistance is seen in the JPY146.50-65 area. The Australian dollar extended its advance to slightly above $0.6750 today, its best level since July 17. Last month's peak was about $0.6800, before the Aussie collapsed to $0.6350 in early August. It settled yesterday for the second consecutive session above the upper Bollinger Band (~$0.6740 today). Initial support may be near $0.6715. The movement of the yen continues to seem like the best short-term indicator of the movement of the offshore yuan. The dollar fell to almost CNH7.1125 today, its lowest level since August 5 (when the dollar also bottomed against the yen). As it did against the yen, the greenback has recovered and is higher on the day. The low for the year was set then near CNH7.0840, slightly below the six-month low set at the end of 2023. The PBOC set the dollar's reference rate at CNY7.1307 (CNY7.1325 yesterday). The onshore yuan is trading a little weaker than the offshore yuan. 

Europe

Outside of UK government finances, the news stream from Europe is light today. It picks up tomorrow with the preliminary August PMI. The eurozone readings look likely to be little changed from July, when the composite held barely above the 50 boom/bust (at 50.2). The last time the manufacturing PMI was above 50 was June 2022. The euro's rise to new highs for the year reflect the broad pullback in the dollar not good news from Europe. Meanwhile, Germany's apparent decision not to commit new aid to meets its debt brake rankles many observers. Existing aid programs are funding and Germany has been Ukraine's largest military donor after the US. This year's budget called for 7.5 bln euros of assistance but the draft of next year's budget allocates 4 bln euros. Still, it sounds rich for Americans, including former policymakers lecturing Germany and other countries to spend more, while their own country does not know the definition of fiscal discipline. The roughly 6.5% US budget deficit during a period of above trend growth (last year and this year) appears unprecedented. The IMF has called the US out over it, but instead of reforming, US protagonists complain about the IMF's seemingly acceptance of contradictory Chinese external balance data. For its part, the UK was the best performing G7 economy in H1. Although economists expect it to slow in H2, the August PMI is expected to have risen, with the composite edging up to 53.0 from 52.8 in July.

The euro and sterling saw new highs for the year as their dramatic rallies continue. The euro set a recent low near $1.0780 on August 1. It pushed above $1.11 yesterday for the first time since last December when it peaked near $1.1140. Today's high has been slightly below $1.1135. It settled above its upper Bollinger Band on Monday and Tuesday. It comes in near $1.1135 today. The power of the move can be seen in that euro has closed on its session highs for the past three sessions. Sterling is consolidating inside yesterday's range when it set a marginal new high for the year, taking out the July high by less than a tenth of a cent to briefly trade above $1.3050. The recent low was set a week after the euro and on August 8 its traded to $1.2665 before staging a key upside reversal. It settled above the upper Bollinger Band, which is near $1.3030 today. Support is seen near $1.2975.

America

Today's annual revision of the US job growth from April 2023 to March 2024 has captured the imagination of many market participants and observers. It may be more important than Fed Chair Powell's speech at the end of the week at Jackson Hole. However, the policy impact may be less than imagined as Federal Reserve officials, including Powell, have recognized that payroll growth has likely been overstated. The market already is highly confident of a rate cut in September and Powell may simply validate expectations. More than that, the derivatives market is pricing in almost a 30% chance of a 50 bp move, which seems at least partly predicated on the idea that the labor market is much weaker than it appears. Estimates of a downward revision range from around 600k to a million from the 2.9 mln nonfarm payroll growth the BLS has reported. At the high end, it translates into about 83k few jobs a month on average or about 38% fewer posts. The revision would confirm what many have suspected: that the balance of risks has shifted from inflation to employment. The soft-land rhetoric is about employment. The NY Fed survey released earlier this week found that the number of Americans who think it is likely that they will be unemployed in the next four months reached a 10-year high. Yet, we suspect that the downward revision will not come as a significant surprise to the Fed, and the August jobs report (September 6) is expected to be somewhat better than July, with a third more jobs created, and the unemployment rate may have eased a little. The FOMC minutes are likely to confirm the low bar for a September rate cut, but without the sense of a panic. The economy is not overheating, making the current maximum restrictive policy is no longer necessary. 

Canada's softer than expected inflation report did not change expectations the central bank’s trajectory as much as boost the confidence of quarter-point rate cuts at the remaining three meetings this year beginning with the one on September 4. The Canadian dollar underperformed yesterday, rising less than half of the next weakest G10 currency, the Australian dollar, which rose by 0.2%. Key support at CAD1.36 was approached, and it held, underscoring it importance. It is continuing to test it today. It may take a break of last month's intraday low near CAD1.3590 on a closing basis to confirm the break, which, instructively, is more a function of the US dollar than favorable developments in Canada. The Mexican peso had the dubious honor of being the weakest of the emerging market currencies, falling by 1.7% against the dollar, its worst day in a couple of weeks. Mexico reported a 0.5% drop in June retail sales. The median forecast in Bloomberg's survey was for a 0.2% gain, while May's 0.1% gain was revised away. Given the Canadian dollar's underperformance too, it gives a sense of sell North America. Still, the Brazilian real's 1.0% loss was third worst (in between it and peso was the Russian ruble). In Latam, only the Colombian peso appreciated (~0.5%). Many Mexican judges were joining other judicial workers on an indefinite strike against the judicial reforms that would make judges, including Supreme Court justices, elected officials. The new congress is expected to vote on the reforms next month before president-elect Sheinbaum's inauguration on October 1. The greenback reached almost MXN19.07 today but has turned lower and is trading below MXN18.95 in Europe.