Xe Morning Update - Your daily market wrap

Developments in markets for Wednesday 05 November......

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
• AUD/USD:??sell-off halted around 0.6460, rebounds through 0.6500
• Sentiment improves: yields higher, USD steady, equities pare prior days losses
• ISM Services PMI: service sector expands at fastest rate since February
• ADP Employment change: +42K new jobs, suggesting labour market is stabilising
• NZ employment report: unemployment rate ticks up from 5.2% to 5.3% in 3Q
• Day ahead: BoE meeting the headliner, a tight count likely to deliver no change

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......

Following Tuesday's bleak U.S. session, risk assets have found some stability. The S&P 500 and Nasdaq recovering a portion of their losses, which were seemingly driven by growing concerns over the sustainability of the exuberant, AI CAPEX-fuelled rally - one of the most significant on record for a six-month period. Intraday moves within major currencies have been modest, the U.S. dollar holding its ground as treasury yields rebounded on improving sentiment. Logging a quarter percent gain, the Australian dollar attempts to base around 0.6460, rebounding around 40-pips from its 3-week low.
 
As the U.S. government shutdown entered its 36th day, surpassing the previous shutdown (2018-2019: Trump's first term) as the longest on record, the dearth of crucial macroeconomic data continues. This week should have delivered key readings on the U.S. labour market via JOLTS Job Openings and Friday's nonfarm payrolls, thereby influencing both the Fed's and the market's assessment of whether the final FOMC meeting of the year requires a third quarter-point cut.
 
Instead, the focus has shifted to Wednesday's private data releases: the ADP Employment Change and the ISM Services PMI. The former is often seen as unreliable due to its, at times, weak correlation with the official BLS NFP data point. The ISM Services PMI rose to 52.4 from 50.0, representing the strongest expansion since February. The employment sub-index continued to report ongoing jobs contraction. 
 
ADP reported that private businesses in the U.S. added 42,000 jobs in October (vs 25K, expected), rebounding from September's ugly reading of -29K jobs lost.  The upside beat is a welcome surprise following two consecutive months of losses, the first time this had occurred since the pandemic affected job losses in 2020. However relative to jobs gains earlier in the year, 42K represents modest jobs growth and therefore would support a December cut in the eyes of Governor Stephen Miran and other FOMC doves.
 
Conversely the hawks would argue that the labour market appears balanced as losses have slowed and reversed in recent months. Layer in above target inflation, the backdrop requires the Fed to pause the easing cycle to receive more data to assess the near-term outlook for the world's largest economy.

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

Whilst on the topic of jobs data, New Zealand's employment report for the September quarter was released recording the unemployment rate ticked up from 5.2% in 2Q 5.3%, employment remained flat and wages growth slowed. The data, a lagging indicator, reinforces the case for the RBNZ to deliver an additional 25-bps at the 26 November meeting, the final for the year and potentially the final cut for the cycle given more timely activity data suggests the economy is responding positively to 300-bps of cumulative easing.
 
Having ascended to 12-year highs, Tuesday, marked a few pips north of 1.1530, AUD/NZD has consolidated gains through Wednesday's sessions, ranging between 1.1470 and 1.1500. The pair is due a pullback given momentum indicators have climbed into extreme overbought levels.
 
To the day ahead, the conclusion of the Bank of England's monetary policy meeting is the main event, a divided committee (MPC) likely to deliver an on-hold decision. Markets assign a circa 30% implied probability the bank rate is lowered by 25-bps to 3.75%. Whilst inflation appears to have peaked, it remains elevated. Four of the nine MPC members are regarded as hawks and likely to vote in favour of an on-hold decision, setting up a likely tight 5-4 vote count. The key question is whether the committee will offer any form of forward guidance, opening the door for a December cut.
 
One of the weakest performing G10 currencies over the past month, the British pound has been under pressure due to the mix of softer-then-expected CPI data and expectations the November 26 budget announcement will be focused on fiscal consolidation - chancellor Reeves set to deliver a mix of tax increases and spending cuts to reign in the ballooning sovereign debt.
 
From its 17 October swing low, marked near 0.4800, AUD/GBP rebounded over 4%. Pulling back from last week's highs around 0.5000, the pair attempts to springboard from 0.4960 to resume its ascent. A key resistance zone is located at 0.5040/60.
 
Shifting the focus back to AUD/USD, yesterday's intraday low a pip or so below 0.6460 must remain untested to entertain a basing call. Of note, yesterday's lows were marked above the prominent October swing lows logged around 0.6440.
 
Raising the line of sight, 0.6520/60 presents as a critical resistance zone to clear……a goal for next week should the rebound continue.
 
Have a good day.
Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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