OANDA:USDJPY   U.S. Dollar / Japanese Yen
By Andria Pichidi

Yesterday’s contraction signal from the disappointing US Manufacturing PMI rekindled concerns about the fallout from ongoing geopolitical trade tensions, while this adds further pressure on the upcoming Jobs report on Friday.

The reading was an indication that trade and tariff turmoil continues to cast a dark shadow over the global economy. The US ISM manufacturing index dropped to 49.1 in August, weaker than expected, but not a surprise, after slipping 0.5 ticks to 51.2 in July. This is the first time in contractionary territory since August 2016, and it is the lowest since January 2016. Every component but supplier delivers is now below the 50 expansion, contraction line. Meanwhile, the Markit manufacturing PMI slipped as well, printing the lowest outcome since September 2009, as it holds above the contraction line.

Significant is the fact that the employment sub-component fell to 47.4 from 51.7. This could be a negative singal for the upcoming jobs report from US on Friday, as a possible contraction in manufacturing sector may result to cut the number of Jobs in the particular sector.

However, let’s flip back to the Non-Farm payrolls report which is expected to post a rise up to 165k in August after the in-line outcome seen last month with a 164k increase. This forecast is well below the 223K seen in 2018.

The jobless rate ticking down to 3.6%, alongside gains of 0.3% for both hours-worked and hourly earnings . Initial claims remained firm in August, while most consumer confidence eased to still firm levels. Most producer sentiment measures rebounded slightly, but vehicle assemblies could moderate from an elevated June-July pace.

Meanwhile, yesterday, US reports revealed a surprisingly large August ISM-NMI bounce to 56.4 from a 3-year low of 53.7, alongside a similar ISM-adjusted bounce to 56.1 from a 3-year low of 53.0. The employment gauge fell, however, to a 2-year low of 53.1 from 56.2. The July factory goods report largely tracked assumptions, with a weak -0.1% nondurable inventory figure but a firm 0.8% gain for nondurable factory shipments and orders, alongside only minor revisions to the durables data for orders, equipment, shipments, and inventories. We saw a big 195k August ADP rise but a 1k uptick for initial claims to 217k. Yesterday's August vehicle sales figures revealed a 1% rise to a 17.0 mln clip that beat estimates, though we expect a vehicle assembly rate pull-back to the 11.3 mln area after a three-month climb to 11.6 mln in July. The Q2 productivity report revealed no revisions in previously released gains of 2.3% in Q2 and 3.5% in Q1, though we did see upward revisions in the already-robust 2019 compensation figures.
We still see balanced risk for our 165k August nonfarm payroll estimate. All of today's data are tracking an economy that is exhibiting continued moderate growth, despite the market's slowdown fears. We still expect a Q2 GDP boost to 2.1% from 2.0%, followed by 2.4% growth in Q3.


FX Markets so far today:


The dollar majors have remained within respective Thursday ranges, though some yen and Swiss franc cross rates have clawed out fresh highs, with GBP-JPY and AUD-CHF , for instance both seeing new one-month highs. The backdrop remains one of a cautious risk-back-on sentiment, with investors finding tonic from the U.S. and China's path to another round of face-to-face trade negotiations, and by market-favourable political developments in both the UK and Italy. There are, of course, good reasons to be sceptical with regard to the prospects for a breakthrough on the U.S.-China trade front, given the multiplicity of past disappointments and with Beijing seemingly of a mindset, unencumbered by an election cycle, to use its tactical advantage of patience through to the U.S. presidential election in November 2020. On the Brexit front, Labour, the principal opposition in the UK, has made it clear they won't support PM Johnson's call for a new general election until after the no-deal bill is passed, and not until October 19, which is the date -- assuming, as looks 100% certain, there hasn't been a new Brexit deal agreed in Parliament or that Parliament doesn't vote in favour a no-deal exit -- that a 3-month Brexit extension will become the legal default. Labour reportedly wants to delay an election until after October 31, in fact, thinking it will damage Johnson politically as he would have failed to deliver Brexit "no its or buts" by Halloween. This should keep the pound underpinned, for now, though the spectre of a no-deal Brexit hasn't disappeared as Johnson and his Tory party could of course still win in an election.


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