Overnight Headlines

*US stocks rose for a third day on a stop gap debt ceiling plan

*USD edged lower as markets await today’s NFP

*Oil climbs on switch from gas and doubts over US releasing reserves

*US 10-year Treasury yields rise to 1.60%, highest since early June

US equities advanced for a third straight day as sentiment was calmed by a temporary increase in the US government’s debt limit until December. This averts a possible default in mid-October but will cause more angst in the build up to December. The Nasdaq led the way up +1.1% and positive sentiment is continuing in Asia. China has reopened in the green after the long holiday. US futures are mixed.

USD has started Friday with a small bid as bond yields move to multi-month highs. EUR/USD is lower for a fourth straight day this morning after a narrow range day yesterday. GBP regained some lost ground from a day earlier. Cable is trading around the August low at 1.3602. USD/JPY is moving higher in tune with higher bond yields. USD/CAD is trying to break down through this week’s range below 1.2573.

Market Thoughts – N.F.P

As always, much focus is on non-farm Friday with consensus expecting a gain of 450k jobs from the 235k increase in August. The unemployment rate is forecast to ease to 5.1% from 5.2% with wage growth rising 0.4% m/m and 4.6% y/y from 0.6% m/m and 4.3% y/y.

Will the headline print pass the Fed taper test? Chair Powell recently said he did not need to see a knockout employment report to pass the test, only a reasonably good one. Economists will be checking to see if employment growth accelerated after benefits expired or there are deeper issues like slowing demand. One issue to note is the next debt ceiling talks that will take place after the November FOMC meeting. Fiscal uncertainty delayed the Fed’s taper plans in 2013.

It seems the bar for tapering is pretty low with a 300k print being seen as enough for the Fed to pull the trigger. Dollar bulls are expectant with a buy on dips mentality on any weakness. An inline report will see EUR/USD sell off. A blockbuster report sees USD/JPY ramp higher too as yields advance north. (Interestingly, they are moving already today, and they say the bond market always leads…)

Chart of the Day – USD/JPY eyeing new highs

USD/JPY has a high correlation with the US 10-year Treasury bond yield. These are rising which in turn is pushing this major closer to 112. Indeed, we can see that the move in yields from 1.30% in mid-September onwards saw USD/JPY break out of its summer range from a low near 109.

We made new highs at the end of last month at 112.07. The pullback after six straight days of gains was held up by support at the August high at 110.80. New highs beckon with an NFP of 600k+ with the first target being the February 2020 top at 112.22 and then the April 2019 peak at 112.40. A major barrier sits around 114. Support below is at 111.65 and 110.80.