Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
The top line: A long-awaited U.S. jobs report offered the pound a chance to recover against the Greenback.
The pound to dollar exchange rate has come under notable pressure in the last 24 hours, but it is putting in some gains in the wake of the U.S. jobs report.
? The pair rose to 1.3090 from 1.3060 after the delayed release of the September jobs report which showed the U.S. economy added 119K jobs during the month, more than doubling the 51K that was expected.
On paper, the data should have boosted the dollar as it's the kind of headline that will put paid to an interest rate cut at the Federal Reserve next month.
However, countering the consensus-beating headline is news that the headline unemployment rate ticked higher to 4.4%, whereas it was anticipated that unemployment would be unchanged.
So, it could be argued, the labour market is still softening, which would invite further Fed cuts, even if it skips in December.
Average hourly earnings were also a bearish input, rising 0.2% month-on-month, below expectations of 0.3%.
Positioning is playing a big part in the FX reaction. The dollar rallied hard into the release and it might have required a far bigger surprise to carry it higher still.
? "Unemployment rate important for FOMC drivers and that rally in USD leading into the release shows where positioning was, now we get to see how it washes out," says James Stankey at Forex.com.
A big shift in expectations: The dollar strengthened into the jobs report as the odds of a Fed rate cut slumped in the wake of the midweek release of the minutes of the Fed's most recent meeting, where it lowered interest rates..
?Market-implied prospects for a December cut dropped from around 50% yesterday to 35% today after it was communicated that the bar for another reduction in the Fed Funds rate was higher than investors were expecting.
They're still worried about inflation: The message from the Federal Reserve is clearly that inflation is too high.
Sure, there is strong evidence that the labour market is slowing down, as per today's data, but the minutes show the Fed thinks this is a soft landing for jobs as opposed to anything worrying.
As a reminder, the Fed lowers interest rates to support the economy and save jobs, but the risk is that this boosts inflation. With inflation above 3.0%, it feels it will need to see more evidence that the labour market is truly in trouble before going harder.
? Economists at Lloyds Bank have sifted through the minutes and say these are the standout developments:
- Once balance sheet runoff ends this month, look for the reinvestment of maturing assets in the Fed portfolio to be skewed to tbills to bring the duration of that portfolio closer into line with the overall stock of Treasury securities.
- The decision to vote for an October rate cut was ambivalent as ‘some supported such a decision but could also have supported maintaining’ rates as well as ‘several’ being against a cut.
- In an extended paragraph specifically on the December decision ‘many’ don’t envisage another cut this year and there is clearly division with ‘strongly differing views’ about the next vote.
- Those who supported a cut seemed to emphasise ‘downside risks to employment’ having risen, so that looks like it will be crucial for the December vote.
Nvidia to the rescue: However, the pound's selloff might have been more severe were it not for the release of Nvidia's results, which bolstered investor sentiment and limited safe-haven demand for the dollar.
? "Nvidia’s Q3 results reinjected positive sentiment into a market that had been reflecting concerns over potentially frothy valuations in the tech sector," says a note from Lloyds Bank.
How Nvidia did. Richard Windsor, a specialist in the sector at Radio Free Mobile, is best placed to comment on the performance of a company that forms the bedrock of the AI stock market phenomenon:
"Nvidia produced results tailored with surgical precision to do just enough to keep the AI party rolling, but not so much that expectations become overblown and everyone gets the mother of all hangovers."
?⬆️ He explains Nvidia produced another set of "excellent results" with revenues / EPS of $57.0bn / $1.30, comfortably ahead of expectations of $54.9bn / $1.26 and guided nicely for the coming quarter.
In FQ4 26, revenues are expected to be $63.7bn – $66.3bn ($65.0bn), again nicely ahead of the consensus forecast of $62.3bn.
? "The outlook is for more-of-same for at least a few more quarters, which will provide great relief to nervous investors," says Windsor.