Dollar Soars as Bond Yields Jump on US Labor Market Strength

The dollar index (DXY00) today is up by +0.45% at a 7-week high.  The dollar has rallied every day this week as stronger-than-expected US economic news has reduced the chances for a 50 bp Fed rate cut at next month’s FOMC meeting.  Today’s US Sep payroll report added to recent hawkish news as nonfarm payrolls and average hourly earnings rose more than expected, hawkish factors for Fed policy.  According to the swaps market, the chances of a 50 bp rate cut by the Fed at the November 6-7 FOMC meeting fell to 9% today from 35% Thursday.  The dollar also has support on increased safe-haven demand from the escalation of hostilities in the Middle East.   

US Sep nonfarm payrolls rose +254,000, showing a stronger labor market than expectations of +150,000 and the largest increase in 6 months.  The Sep unemployment rate unexpectedly fell -0.1 to 4.1%, showing a stronger labor market than expectations of no change at 4.2%.

US Sep average hourly earnings rose +0.4% m/m and +4.0% y/y, stronger than expectations of +0.3% m/m and +3.8% y/y.

The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 6% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) today is down by -0.48% and fell to a 7-week low. Today’s stronger-than-expected US Sep payroll report is pushing the dollar higher and undercutting the euro. Dovish comments today from ECB Governing Council member Centeno are also weighing on the euro when he said inflation in the Eurozone is close to 2%.

French Aug industrial production rose +1.4% m/m, stronger than expectations of +0.3% m/m and the largest increase in 15 months.

ECB Governing Council member Centeno said, "The dynamic of the labor market in the Eurozone is cooling a bit, and inflation is very close to 2%."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 92% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) today is up by +1.10%.  The yen today tumbled to a 7-week low against the dollar.  The yen is under pressure, as comments this week from Japanese Prime Minister Ishiba and BOJ Governor Ueda signaled that the BOJ is not in a hurry to raise interest rates.  The yen extended its losses after today’s stronger-than-expected US Sep payroll report pushed T-note yields sharply higher. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 3% for the October 30-31 meeting and at +28% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) today is down -7.70 (-0.29%), and December silver (SIZ24) is down -0.314 (-0.97%).  Precious metals today are moderately lower.  Today’s stronger-than-expected US Sep payroll report pushed the dollar index to a 7-week high, weighing on metals prices. Today’s strong payroll report also reduces the chances of a 50 bp Fed rate cut at next month’s FOMC meeting, a bearish factor for gold.  Also, higher global government bond yields today are bearish for precious metals. In addition, today’s rally in stocks has curbed safe-haven demand for precious metals.

Losses in precious metals are limited due to the escalation of Middle East hostilities that have boosted safe-haven demand for precious metals.  The markets are awaiting Israel’s response to Tuesday’s missile barrage from Iran after Israeli Prime Minister Netanyahu vowed to retaliate, saying Iran “made a big mistake” and “will pay.”  An increase in US inflation expectations also boosts demand for gold as an inflation hedge after the 10-year breakeven inflation rate rose to a 2-month high today.

More Precious Metal News from Barchart

• Dollar Climbs on Safe-Haven Demand from Middle East Risks
• Stocks Tilt Lower as Oil Prices Spike
• Stocks Pressured by Middle East Risks
• Dollar Supported by Geopolitical Risks and Higher T-Note Yields

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.