Pound-to-Dollar Rate Eases Back after US Services Data Points to Solid Growth in Fourth-quarter

Ignore the hurricane-induced distortions in October's employment report, the US economy probably got off to a good start in the fourth-quarter, say economists.

The Pound-to-Dollar and Euro-to-Dollar rates gave back gains during noon trading Friday after data suggested the US services sector could be expanding at a faster pace than previously thought, helping to wash away earlier losses for the Dollar.

October’s ISM Non-manufacturing PMI came in at 60.1, its highest level since August 2015 and ahead of the economist consensus for a thirty basis point fall in the index to 58.5.

The data came closely on the heels of a hurricane-distorted labour market report, which saw payrolls grow below consensus and average earnings growth splutter to a halt - pushing the Dollar onto the back foot.

“Hard data has been reflective of the gains made in both ISM indices recently, and today's reading is encouraging for another healthy month for businesses,” says Royce Mendes, an economist at CIBC Capital Markets.

Both Pound-to-Dollar and Euro-to-Dollar rates began to give back earlier gains in response to the ISM report.

Earlier in the session, US non-farm payrolls growth came in at just 261k for October, far below the 312k consensus forecast, while wage growth was shown grinding to a halt at 0.0%.

October’s unemployment rate came in ten basis points lower, at 4.1%, than the previous month’s jobless number.

The Dollar fell in response to the labour market report although the earlier response was more the result of the 0.0% rise in average earnings than it was the weaker-than-expected payrolls figure, as wages matter more for inflation and have a higher impact on the Federal Reserve policy outlook.

Markets had been expecting a 0.2% rise in wages to come on top of September’s strong 0.5% rise.

Some may have taken September’s strong number to be indicative of underlying strength in the labour market but economists argue the earlier number was skewed.

Lower wage workers were less likely to get paid for time-off during September’s hurricanes and so economists see this as having shown an artificial increase in wage growth.

A still-large portion of the pie (total pay) shared between a much smaller number of mouths (workers) gives everybody a bigger slice - in September.

"The labour market hit a bump in the road, but it was only a bump,” says CIBC’s Mendes. “October payroll numbers showed a solid rebound in hiring, gaining 261k, a month after hurricanes ravaged parts of Texas and Florida.”

“On second look, September's numbers were also revised higher from a decline of 33k to a gain of 18k," Royce adds.

Boris Schlossberg, a director at BK Asset Management, had rightly flagged the market as being overly optimistic about October’s payrolls.

“Not all employees may have returned to work by October so the prospect of a smaller than expected bounce is quite real," he wrote in a note ahead of the release.

Schlossberg also said the wage figure might be lower-than-expected because September took a lot of hospitality workers out of the equation and their reintroduction in October could bring down the average wage figure.

The Pound-to-Dollar rate was quoted 0.16% higher at 1.3071 around the London close while the Euro-to-Dollar rate was 0.51% lower at 1.1600.

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