The Employment situation Report: Nonfarm Payrolls and Unemployment

• US labor market is forecast to have produced 188,000 new jobs in September, but recent data suggest the risk is for a stronger number. The unemployment rate is expected to drop to 3.8 percent and wages to have gained 3.0 percent on the year.
• The Treasury sell-off is roiling markets, supporting the dollar against a wide range of currencies particularly in emerging markets.
• Brexit negotiations appear to be back on track after Prime Minister Theresa May's successful speech at the Conservative Party conference.

U.S. Economy

Recent U.S. economic information has been robust. The economy was confirmed to have expanded at 4.2 percent in the second quarter and the Atlanta Fed's GDPNow estimate for the third quarter is 4.1 percent. The model will be updated after Friday's employment report. 

New jobless claims were 207,000 for the week of September 28th, near a 49 year low.  The ISM gauge of activity in the U.S. service sector, about 80 percent of GDP, reached an all-time high at 61.6 in September according to the Institute for Supply Management's purchasing managers' index. The employment index from the same survey rose to 62.4, also the highest on record and the new orders remained buoyant at 61.6. 

The ISM manufacturing index fell slightly in September to 59.8 from August's 14 year top of 61.3 which had capped the best two year performance of factory sector in a generation.  New orders scored 61.8, its 33rd straight month of growth and the index has remained above 60 for 17 consecutive months. Manufacturing employment remained expansive at 58.8 up from 58.5 in August.  Despite concern about the potential impact of tariffs demand for manufactured goods remains strong. 

Private payrolls, as recorded by the data processing company ADP, continued their strong expansion in September adding 230,000 new positions. It was the largest gain since 241,000 in March and far ahead of the 185,000 consensus estimate and August’s revised 168,000 total.    

Consumer sentiment continues to be optimistic with the Michigan Consumer Sentiment Index at 100.1 for September near the decade high of 102.0 in March of this year.  U.S. factory orders rose 2.3 percent in August, an 11-month high, and are 8.6 percent stronger on the year. Durable goods purchases increased 4.4 percent.  Inflation remains in check near 2 percent.

As Federal Reserve Chairman Powell put it after central bank raised its base rate last week, and increased its estimate for 2018 growth, 'These are the good times for the economy."  The U.S. labor market should maintain its exceptional performance. 

Treasury rates have spiked sharply higher with the yield on the U.S. 10-year reaching 3.22 percent providing backing for the dollar against a wide range of currencies. 

Prime Minister Theresa May's speech to the Conservative Party's annual gathering has allayed market fears that the two sides had reached an impasse but with the EU summit onOctober 18th fast approaching the euro has been deflating from the increasing risk of a breakdown in the talks.

Eur/Usd

The united currency has been under pressure from several factors.

The euro traded below 1.1500 on Wednesday for the first time in two weeks and though it recovered briefly to 1.1540, it remains heavy.

Italy

In Italy, the coalition government of 5 Star and the League proposed deficit budgeting at 2.4 percent of GDP for three years beginning in 2019, in direct contravention of EU rules limiting  deficits to 2 percent of GDP. The budget must be submitted for EU Commission approval  by October 15th, with approval or rejection not expected until late November.  Though Rome has since said it will aim to reduce its projected deficits to 2.1 percent in 2020 and 1.8 percent in 2021, 2.4 percent next year is unchanged. The government parties, which have strong euro-skeptic histories, were elected on plans to revive the Italian economy, largely stagnant for 15 years.  They would swiftly lose backing if they were to give up their effort to improve the economy.  Likewise the EU, facing an external threat to its unity from the UK departure is loath to permit its authority to be so publicly traduced. This conflict at the heart of the EU and the Eurozone is weighing on the euro.

Brexit

Although the market assumption remains that the EU and the UK will manage to negotiate a departure agreement, the public acrimony over the past weeks has brought the fear of an unregulated separation to the fore.  The economic and financial turmoil that could ensue with an unstructured departure would damage the euro as much as the pound, perhaps more so, as the euro has gained slightly against the dollar since the Brexit vote in June 2016 and the sterling is substantially lower. 

Federal Reserve/ECB

The Fed's rate hike last week and confirmation that it expects four more increases by the end of next year coupled with the sharp jump in Treasury rates have overshadowed the end of the ECB bond buying program schedule for December.  The European bank is far behind its Atlantic counterpart in the current rate cycle.