Watch out for September NFP

In focus today

This week's most important macro release, the US September Jobs Report, is due at 14.30 CET. We forecast non-farm payrolls growth at +160k, slightly above consensus. We foresee average hourly earnings growth at +0.2% m/m SA and unemployment rate steady at 4.2%. A solid print in line with our call would ease the Fed's pressure for further large rate cuts. We still expect only 25bp reductions at the upcoming meetings.

Economic and market news

What happened yesterday

In the US, ISM services for September printed stronger than expected at 54.9 (cons: 51.7), driven by upticks in all subcomponents except employment. The Challenger report showed declining layoffs in September. This week's labour market data has generally surprised positively, while leading indicators such as ISM and PMI have signalled cooling employment growth. All in all, it suggests that labour market conditions are relatively robust.

In the euro area, the September euro area services PMI was revised up to 51.4 (flash: 50.5), and the composite PMI to 49.6 from 48.9. Thus, services continue to expand, though at a lower pace, while manufacturing remains below 50. The upward revision driven by Spain and France, while German services PMI was steady at 50.6 and a slight downward revision for Italy. With the service sector holding up growth, we estimate that euro area GDP continued to expand in Q3 thanks to the Southern European economies holding the average composite PMI above 50 in Q3.

In Norway, the seasonally adjusted house prices rose 0.4% m/m in September, coming in just below Norges Bank's forecast of 0.3%. However, we do not see this as a deciding factor for the rate setting and our call of a pause in November and December.

In Switzerland, the inflation figures for September surprised markedly to the downside. Headline came in at 0.8% y/y (cons: 1.0%, prior: 1.1%), core likewise dropped to 1.0% (cons: 1.1%, prior: 1.1%), and monthly pressures fell into negative territory. We have two more prints until the SNB December meeting, but with inflation now in lower part of the target range this should increase the probability of 50bp cut in December. While SNB updated their inflation forecasts last week, inflation once again undershoot the projections.

In Sweden, the September services PMI surprisingly dropped below 50 (49.1 from 52.4), as all subcomponents are now below the neutral level. This contradicts last week's NIER business survey, which showed improved sentiment in the services sector. That said, it remains to be seen if this is a one-off or a shift in the trend.

In the UK, Bank of England (BoE) Governor Bailey noted, in an interview with the Guardian, that if the news on inflation continued to be good there was a chance of BoE becoming "a bit more activist" in its approach to cutting interest rates. While the comments reinforce that Bailey is in the dovish camp (opposed to chief economist Pill, who will give a speech today) a gradual pace of cutting remains the BoE base case. Bailey's comments largely drove the sharp weakening of GBP yesterday vs both EUR and USD. We think the large move lower vs EUR and USD likely reflects some profit taking. Additionally, we are inclined to think the market may be overreacting, placing too much emphasis on a single comment given the limited MPC communication. The MPC showed a strong preference for the gradual approach with an 8-1 vote favouring an unchanged decision in September coupled with hawkish commentary.

In commodities space, oil prices jumped 5% during yesterday's session due to growing concerns over potential Israeli retaliation against Iran's oil industry amid comments from US President Biden.

Equities: Global equities were lower yesterday, with most regions, excluding Japan, experiencing declines. Defensive stocks outperformed, though not in a full-blown risk-off manner, and notably, the technology sector in the US registered gains yesterday. We are currently on course for a modest weekly decline in equities; however, much could change following the non-farm payrolls (NFP) release today. More notably, the implied volatility is on the rise, with the VIX escalating from 18 to 21 this week. This increase signals heightened uncertainty rather than a shift in the prevailing narrative. Investors continue to anticipate a soft landing, yet the array of factors at play currently contributes to significant uncertainty. In this late-cycle phase, where growth is improving and operating above potential, we typically advocate for the VIX to be in the 15-17 range. Consequently, the current level of risk and uncertainty is curbing optimism and limiting equity performance. In the US yesterday, the indices closed as follows: Dow -0.4%, S&P 500 -0.2%, Nasdaq -0.04%, and Russell 2000 -0.7%. Asian markets presented a mixed picture this morning, with Chinese stocks in Hong Kong notably outperforming. Futures in the US and Europe are marginally higher.

FI: Global rates moved higher through yesterday's session as inflation expectations rose in tandem with energy prices following Biden's comments of a potential Israeli strike on Iranian energy facilities. Brent is now trading at USD77.5/barrel vs USD72/barrel at the start of the week. Yesterday's move in rates was especially evident in the long end, where 10Y yields rose 5bp in Germany and 7bp in the US. With markets now pricing 33bp ahead of the November FOMC meeting, today's NFP release has the potential to push market volatility substantially higher.

FX: Yesterday's strong ISM services print pushed US yields higher, acting as a tailwind for the greenback with EUR/USD edging closer to one-month lows around 1.10. Oil prices continue to climb on the back of heightened geopolitical risks, with Brent reaching the highest levels since late August. GBP and JPY were among yesterday's losers, whereas Scandies were little changed on the day. We decided to book a profit on our long NOK/SEK as the cross edged above 0.97.