September Nonfarm Payrolls: Fed Has the Reason to Keep Raising Rates

Summary:

Nothing in the September nonfarm payrolls should deter the Fed from continuing its aggressive monetary tightening path. While the number of new jobs created is the lowest since April last year, coupled with a fall in the unemployment rate, it should be considered a satisfying signal. However, it also reflects a fall in the participation rate, which is not a data that will please the Fed.

The nonfarm payrolls report released by the US Bureau of Labor Statistics on Friday showed that 263,000 new nonfarm payrolls were added, slightly better than the 250,000 expected by the market. In addition, July nonfarm payrolls were revised upwards from 526,000 to 537,000, while August nonfarm payrolls remained unchanged at 315,000. The three-month average was 37.2 (previously revised to 38.2), which can now be roughly divided into two phases, one being the "500,000-era" from the beginning of the year to June, and the other being the "300,000-era" so far. Besides, the August JOLTS job vacancies released on October 4th showed 1.67 job vacancies per unemployed person, a sharp drop from the previous month's 1.90, the largest single-month drop on record, and the first time since last September that the figure fell below 11 million. These shocking figures suggest a probable slowing in labor demand, but the fall in vacancies was mainly in the health services and retail sales sectors, where demand fluctuates, meaning that the drop in vacancies was not very significant and the overall job search rate remained high. The nonfarm payrolls are good evidence of this, proving that while the labor market has eased, it is far from the Fed's standards.

Regarding the breakdown of non-farm payrolls announced by the Bureau of Labor Statistics, leisure and hospitality, which has been 'listed' several times, added 83,000 new jobs, significantly higher than the previous value of 31,000, showing signs of a resurgence. Among the sectors that started to "emerge" from the June nonfarm payrolls, professional and business services added 46,000 jobs (previously 68,000), while education and health services added 90,000 jobs (previously 68,000).

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In addition, accommodation and food services added 66,700 jobs, significantly higher than the previous month's 22,500. Among its sub-sectors, food services, which also often shines in nonfarm payrolls, continued to dominate, adding 60,000 jobs (previously 18,200), completely overshadowing the total number of new jobs in the entire goods-producing sector, reflecting the steady demand for eating out. Compared to food services and drinking places, the accommodation sector was a little more subdued, adding 6,700 jobs (vs. 4,300 previously), but this is not a bad performance considering that the sector did not add, but rather lost 200 jobs during the July non-farm payrolls.

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Notably, the education and health services sector added 90,000 jobs, mainly in the health care and social assistance sector (75,400), with 28,100 new jobs in ambulatory health care services, 27,500 in hospitals, and 19,100 in individual and family services under its subsector. With the US public accepting the new normal of "living with COVID", it is difficult for the Biden White House and even state and local governments to reintroduce strict anti-pandemic measures (such as social distancing, indoor mask orders, and vaccination requirements), and the effectiveness of the third booster dose administered earlier in the year is also declining near its threshold.

This is also a reflection of the implied economic and social costs of the long-term symptoms of the new "living with COVID" norm in the US. This, coupled with the continued emergence of sequelae, is likely to be a long-term driver of consumption and services.

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The unemployment rate fell from 3.7% last month to 3.5%, back to the level of July's nonfarm payrolls. Also, the labor force participation rate fell back to 62.3%. In the last nonfarm payrolls, the rare rebound in the unemployment rate was like a lifeline to a market eager to see the labor market loosening and accelerating recession to force a rate cut, and because of this, market expectations of a Fed slowdown in rate hikes rose rapidly at the time and have since recurred, but this decline in the participation rate and unemployment rate once again proves that the labor market may have eased compared to before. Nevertheless, the extent of its slowdown is still far from a satisfactory level, giving the Fed reason to continue the aggressive rate hikes.

The hourly earnings figure fell to 5.0% from 5.2%, a 0.3% increase from the previous year, unchanged from the previous value. Overall payrolls rose 10 cents to 32.46%. Even though, many employers remain short-staffed and continue to hire at a solid pace. This strong momentum is not only supporting consumer spending but also driving wage growth as companies compete for limited labor resources. It also suggests that the Fed will continue to raise interest rates to curb wage growth. After all, one of the Fed's biggest concerns is wage inflation triggered by a tight labor market, and higher wages could make inflation harder to control.

As the fourth quarter kicks off, major US holidays such as Halloween, Thanksgiving, and Christmas Eve follow. In particular, the Christmas break season, which begins on Black Friday and continues until New Year's Day, will be a peak period for consumer demand for goods and services. On the other hand, the implied economic and social costs of the new variant of Omicron and the long-term symptoms of COVID-19, with labor shortages likely to intensify again, will deteriorate the strained labor market. The current options pricing reflects the probability of a 75-bps rate hike in November has been pressed past 50-bps, while the December FOMC meeting is still biased towards a 50-bps rate hike and a 75-bps rate hike probability of only 23.4%. Furthermore, terminal rates lift again, but with the release of October and November nonfarm payrolls, it is expected that the probability of a 75-bps rate hike at the December meeting will also be elevated.

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Devin

Britain's economy looks set to go into recession as data showed it unexpectedly shrank in August, underscoring the challenge for Prime Minister Liz Truss to make good on her promises to speed up growth.

Weakness in manufacturing and maintenance work in North Sea oil and gas fields contributed to a 0.3% fall in gross domestic product from July, and the report also showed how a jump in inflation was hitting consumers.

A Reuters poll of economists had pointed to zero growth.

July's increase in output was revised down to 0.1% from a previous estimate of 0.2%, and in the three months to August GDP fell 0.3%, its first decline since early 2021 when the country was mired in the coronavirus crisis.

"The ongoing squeeze on household finances continues to weigh on growth, and likely to have caused the UK economy to enter a technical recession from the third quarter of this year," Yael  Selfin, chief economist at KPMG UK, said.

The economy was now believed to be back at its size just before the pandemic, having previously been estimated at 1.1% above that, the Office for National Statistics said.

Manufacturing fell by 1.6% from July and more maintenance than unusual in the North Sea hit the mining and quarrying sector which includes oil and gas. It slumped by 8.2%.

"Many other consumer-facing services struggled, with retail, hairdressers and hotels all faring relatively poorly," ONS Chief Economist Grant Fitzner said.

GDP in September is likely to be weakened by a one-off public holiday to mark the funeral of Queen Elizabeth.

Further ahead, Britain's economy looks set to slow sharply as surging inflation hits households and forces the Bank of England to raise interest rates quickly, even as activity stagnates.

Samuel Tombs, an economist with Pantheon Macroeconomics, said around one-third of households no longer had meaningful savings and the 30% with a mortgage were likely to reduce expenditure as borrowing costs went up.

"The combination of the protracted hit to real incomes from mortgage refinancing, the usual lags between changes in corporate sentiment and spending decisions, and the constraints macro policymakers now face suggests that the recession won’t end until late 2023 at the earliest," Tombs said.

The International Monetary Fund said on Tuesday it expected British GDP to grow in 2023 but only by 0.3%.

That was stronger than its forecasts for the economies of Germany and Italy to shrink next year as they feel the full force of gas supply cuts from Russia caused by the war with Ukraine.

Truss and finance minister Kwasi Kwarteng have promised to speed up economic growth but their plan for unfunded tax cuts sent financial markets into turmoil and has raised expectations for how quickly the BoE will push up borrowing costs.

The central bank is also trying to slow the surge in market interest rates which has put pension funds under severe strain. It has said it will end its emergency bond-buying support scheme on Friday.

However, amid calls from the funds for a deadline extension, the Financial Times on Wednesday cited three sources as saying the BoE had signalled privately to lenders that it was prepared to continue the emergency programme beyond Friday if market conditions demanded it.

Source: Reuters

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FastBull Featured

Remarks of Officials

Cleveland Fed President Loretta Mester delivered a speech on October 11 on monetary policy, with the key points as follows.

I anticipate that the growth will be well below the trend over the next two years. My outlook is that inflation will move down to about 3.5% in 2023, and continue to decline, reaching our 2% goal in 2025. The unemployment rate is expected to rise to 4.5% by the end of 2023 and increase further in 2024. We are likely to experience higher-than-normal levels of financial market volatility as well.

A continued rise in the labor force participation rate would be helpful in easing the imbalance between labor demand and supply. But it is likely that much of the rebalancing will need to come on the labor demand side rather than the supply side. The rise in the unemployment rate is likely to be smaller than during other economic slowdowns, as many employers have indicated that they will try to retain employees. Recent reports suggest that wage pressures may be starting to stabilize. With trend productivity growth estimated to be around 1.25% to 1.5%, nominal wage growth will need to moderate to around 3.25% to 3.5% to be consistent with price stability.

There has been no progress on inflation, so further rate increases will be needed. Monetary policy acts with a lag on the economy, so we need to be forward-looking. Although we have raised the nominal fed funds rate by 300 basis points, the policy is not yet restrictive. Because I see more persistence in inflation than the median Summary of Economic Projections (SEP) projection, the funds rate path I submitted for the September SEP was a bit higher over the next year than the median path, and I do not anticipate any cuts in the fed funds target range next year. As the current uncertainty is extremely high, we need to remain cautious, not to prematurely declare victory over inflation and pause or reverse rate increases too soon.

In addition, Mester stressed in an interview with Bloomberg on the same day that the U.S. has not yet experienced a market dysfunction, and the Fed will pay close attention to overseas conditions. She believes that the Fed should stick to the balance sheet reduction plan.

In this speech, Mester gave her views on the labor force participation rate, unemployment rate, and wages. It is undoubtedly hinting that the non-farm payrolls is a reason for the Fed to raise interest rates further.

Mester's Speech

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Owen Li

Digital asset manager Grayscale has filed its opening brief against the U.S. Securities Exchange Commission (SEC) to challenge its decision denying Grayscale's application to convert the Grayscale Bitcoin Trust (GBTC) to a spot Bitcoin ETF.

The world's largest digital asset management firm filed its opening legal brief on Oct. 11 in the U.S. Court of Appeals in the District of Columbia Circuit, in which it claimed the SEC's knockback to be "arbitrary, capricious and discriminatory."

Grayscale argued that the SEC treats spot Bitcoin Exchange-Traded Products (ETPs) with "special harshness" and is doing so "in excess of its statutory authority."

Attorneys for Grayscale argued that several Bitcoin Futures ETFs that have been previously approved by the SEC generate their prices based on the same indices as the spot Bitcoin ETF.

They stated that the SEC could not rationally conclude that Bitcoin Futures ETFs do not take on "the very same risks in the very same market" as the spot Bitcoin ETF, adding:

"Although Bitcoin may be a relatively new asset, the legal issue here is straightforward. The Commission has violated the APA's most basic requirements by failing to justify its vastly different treatment of Bitcoin Futures ETPs and spot Bitcoin ETPs."

Grayscale also argued that the SEC's "significant-market test" — one which assesses whether an exchange's proposal to list an ETP is "designed to prevent fraudulent and manipulative acts and practices" – is "flawed" and that the SEC "set the bar so high" that it couldn't possibly be satisfied.

Attorneys for Grayscale also noted that this significant-market test only applies to Bitcoin-related ETPs — which led them to believe that they have been discriminated against.

Grayscale also argued the SEC's decision "harms the 850,000 investors who own shares in the Trust":

"Given that the Commission did not approve the Trust to trade as an ETP on the Exchange, the value of its shares cannot closely track the value of the Trust's underlying Bitcoin assets— depriving Trust shareholders of billions of dollars in value."

"There is simply no justification for continuing to inflict such serious investor harm," the brief stated.

Related: Grayscale legal officer says Bitcoin ETF litigation could take two years

The filing in the U.S. Court of Appeals comes after the SEC officially denied Grayscale's application to convert GBTC to a spot Bitcoin ETF on Jun. 29.

On the same day, Grayscale initiated litigation by filing a "Petition For Review."

According to Grayscale, the SEC must submit its brief by Nov. 9. Grayscale will then submit a reply brief on Nov. 30 before both parties submit a final brief on Dec. 21.

Grayscale had $26.4 billion in assets under management (AUM) in Mar. 2022.

Source: cryptonews

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Kevin Du

Navigating on sight

Rates markets can look forward to a couple of days driven not by Bank of England (BoE) intervention on the gilt market, but by old-fashioned macroeconomic drivers. This is the hope at least. Today's US PPI and Federal Open Market Committee minutes will be reminders that the hawkish Fed juggernaut and strong dollar wrecking ball are the key forces behind the current market volatility. This will be followed by US CPI tomorrow.

Markets are on high alert for a Fed pivot, and have been disappointed so far. Some Fed speakers of late have highlighted that the Fed will soon be in an area where there are two-way risks to tightening policy. If similar comments were made in the minutes, they are likely to get much airplay. In plain English, some Fed officials are worrying about over-tightening but recent data, such as job creations and tomorrow's CPI, should support another 75bp hike according to our US economist.

10Y Treasury yields could well climb above 4% this year before the pivot comes into view. Markets are navigating on sight and volatility is reducing their ability to position for longer-term moves such as the end of this cycle and the subsequent cuts that some, including us, are expecting. The danger of course is that the 75bp November hike is followed by another in December (we expect 50bp), and then another in February (we expect none), should data fail to turn as quickly as we think.

The BoE sticks to piecemeal intervention

The BoE's game of financial whack-a-mole pushed it to announce purchases of gilt linkers yesterday morning. The first operation was more successful than its earlier conventional gilt counterparts, managing to hoover up almost £2bn. Gilt markets remain understandably nervous about the end of the purchases scheduled for this Friday. The 30Y is still the worst performing sector on the curve, but at least some measures of bid-offer spreads have tightened from the extreme levels reached in late September.

The underlying concern for gilt investors remains of course the lack of BoE commitment to support the market in times of stress. Interventions have so far been piecemeal, targeted, and limited in scope and time. Markets are, rightly in our view, inferring that there is strong reluctance at the monetary arm of the BoE to engage in any operations that could expose it to accusations of monetary financing, or more simply to contradict its monetary tightening stance.

All these concerns are understandable but the end result is markets questioning the efficacy of BoE market intervention. History has shown that central bank interventions need to have as little restriction in time or amount in order to be effective. The alternative, market jitters close to each intervention cliff edge (the next one is this Friday), could serve a purpose however. Effectively, by not extending its support in time, the BoE is piling pressure on pension funds to use the facility before it expires. We're far from a level of purchases that would reassure markets, however, for now our base case is for a continued gilt sell-off followed by more BoE intervention.

Tha approach of dealing with cliff edges and market stress when they arise was highlighted by Andrew Bailey yesterday evening. The governor repeated the BoE's ultimatum to pension funds, that they had only three more days to reduce their interest rates exposure before gilt support ends. The stance seemed later contradicted by an article in the Financial Times saying the Bank is ready to extend purchases.

Today's events and market view

European industrial production features prominently on today's European economic calendar.

Germany (10Y) and Portugal (3Y/10Y) will be today's supply slate.

In the afternoon, US PPI will set the stage to tomorrow's CPI. The September FOMC minutes will be closely scrutinised for hints of a pivot. More specifically, any worries about financial stability would resonate with markets in light of the recent volatility.

There is an impressive roster of central banks today to crown this already busy events calendar. Andrew Bailey and Christine Lagarde of the BoE and ECB respectively will be the headliners. It is hard to imagine the BoE governor acknowledging that he expects more gilts purchases, with the focus of his comments more likely to be the fight against inflation. In that light, this should not prove a very positive session for gilts unless the BoE steps up its purchases again (see above).

Source: ING

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Kevin Du

Korea and Chile signed a memorandum of understanding (MOU) for bilateral cooperation in mining and mineral resources in Santiago and agreed to elevate bilateral relations to a strategic partnership, the prime minister's office said.

Prime Minister Han Duck-soo held talks with Chilean President Gabriel Boric at the presidential palace in Santiago, Tuesday (local time), and signed the non-binding pact. Han is on an official trip to the South American country on the occasion of the 60th anniversary of diplomatic ties between the two nations.

"It (the MOU on mineral cooperation) is Korea's bridgehead to entering the Latin American market," Han said, "I think we should invest more in Chile for raw materials like minerals, which are key to economic security."

The MOU calls for research and development cooperation between the Korea Mine Rehabilitation and mineral Resources Corp. (KOMIR) and its Chilean counterpart in the supply of mineral resources, including lithium.

It is part of the country's efforts to deal with the U.S. Inflation Reduction Act (IRA) by diversifying supply chains of key materials used in batteries.

The U.S. law gives tax credits to electric vehicles (EVs) produced in North America or containing batteries made of materials sourced from the U.S. It is feared to present disadvantages to Korean automakers such as Hyundai Motor and Kia, which sell EVs manufactured in Korea to the U.S. market.

However, Korean companies could receive subsidies if they use minerals from Chile, which signed a free trade deal with the U.S. The South American country is rich in mineral resources, ranking first in lithium reserves and second in mineral supply in the world.

In addition, the two countries signed two other MOUs for research cooperation in agricultural technologies and democratic talks.

According to the MOU, Korea's Rural Development Administration and Chile's Ministry of Agriculture will cooperate in agricultural research and development to fight climate change and achieve carbon neutrality. Also, their ministries of foreign affairs will develop shared values on democracy and human rights and regularize a public-private consultative body.

Han also requested Chile to support the country's bid to host the 2030 World Expo in the southeastern city of Busan.

The prime minister is on a three-nation trip to South America. Chile was his first destination. He will also visit Uruguay and Argentina.

Source: TheKoreaTimes

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Owen Li

Russians are exchanging cryptocurrencies for fiat currency directly on the streets. The editors of BeInCrypto conducted talks with representatives of street exchange offices to find out how they work and how transactions are conducted.

What is going on?

In the Russian Federation, restrictions on cash withdrawals have been in force since March 9, 2022. The central bank stopped Russians from withdrawing more than $10,000 or the equivalent in euros. At the same time, this was only possible if the money had been deposited in the account before March 9, 2022.

At the time of writing, the end of this restriction is set at March 9, 2023. However, Russian citizens have no guarantee that the central bank will abolish the limits after this date. A previous deadline was set for September 9, 2022, however, in August the Russian authorities extended it for another six months.

What makes the situation worse?

Many Russians have "frozen" currency in their bank accounts. The situation was also aggravated by other factors:

-The import of cash in dollars and euros to Russia is banned. The restrictions have exacerbated the shortage of cash.

-Many Russian banks are disconnected from the international interbank payment system SWIFT. Customers of such institutions cannot transfer their currency abroad. As an "alternative," banks offer their users the exchange of dollars and euros for rubles. Meanwhile, the exchange rate leaves much to be desired.

-Credit institutions of the Russian Federation have introduced commissions for storing non-cash currency.

-Currency holders in the Russian Federation face the risk of being sanctioned by the National Clearing Centre (KCK).

Stablecoins as a way out of the situation

For many, the way out of this situation is via stablecoins. Among them is the leader in terms of capitalization – Tether (USDT). Tether is pegged to the US dollar at a 1:1 ratio. It can be purchased anonymously, moved without any restrictions abroad and exchanged for a physical fiat. This means that the Tether exchange rate is more stable and profitable than a cashless dollar. For example, at the time of writing this article, one dollar in Sberbank can be sold for 59 rubles. At the same time, the value of one USDT on the Binance P2P platform is 64 rubles.

Due to the growing interest in cryptocurrencies, at the beginning of October 2022, the EU banned the operation of cryptocurrency wallets related to the Russian Federation. Few trading platforms and crypto services, however, are willing to impose restrictions.

It turns out that stablecoins, despite EU attempts to limit Russian access to cryptocurrencies, for many remain a real substitute for the currency. Russian citizens are showing interest in the new financial instrument. And, exchange offices have appeared on the streets of Russian cities where transactions using digital assets can be carried out.

Russians and street crypto exchange offices

BeInCrypto reporters managed to talk to a representative of a street exchange office in Sochi. The point of sale was created near the city market, on a busy street. His main occupation turned out to be buying dollars, as well as USDT.