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The US dollar is mostly consolidating yesterday's gains, with a few exceptions. The Australian dollar is trading at new multi-year lows, below $0.8900 as the market positions for not only an RBA rate cut next week, but signals from the central bank that there is still scope for additional cuts. The Canadian dollar is also seeing follow through selling after yesterday's slide and this despite the sharp rise in oil prices over the past few days. The US dollar is moving above its 20-day moving average against the Loonie for the first time since mid-July.

The dollar is extending its recent gains against the Swedish krona with soft Swedish data in recent days, including an unexpected contraction in Q2 GDP and softer than expected manufacturing PMI continues to take a toll. After the antipodeans, the krona is the weakest of the majors, losing roughly 2.1% against the dollar and 1.7% against the euro this week.

On the other hand, sterling, which has under-performed over the last few days has bounced after testing the $1.5100 level in early Asia. Sterling remains, however, nearly 3 cents below last week's highs. The UK's construction PMI was reported at 57.0, blowing through expectations for a 51.5 reading. This is the third monthly reading above 50 and is the highest in three years. Construction weighed on Q2 GDP, but looks set to contribute to Q3 growth, especially with new orders rising to their best level since April 2012.

Sterling's gains appear to be short-covering, with next week's BOE quarterly inflation report keeping the potential bulls at bay. The BOE is expected to provide a framework for its forward guidance. This will allow Carney to send a dovish signal without having to do anything. He appears to have inherited an economy on the uptake and thus adds to the honeymoon feel.

Asian equities are ending the week on a firm note, though India, Thailand and the Philippines are exceptions. The MSCI Asia-Pacific Index rose a little more than 1%. The pullback in the yen aided Japanese shares and the Nikkei led Asian bourses higher with a 3.3% rise. The Nikkei actually gapped sharply higher and has left a bullish 4-day island in its wake. The financial sector was the strongest, gaining 4.1%, though all sectors were up more than 2.5%, except oil/gas, which was up 0.75%.

European bourses are mixed, with mostly modest moves seen in both directions. The Dow Jones Stoxx 600 is up about 0.25% and is up about 1.7% on the week. Healthcare and utilities are the strongest sectors, while consumer services and telecoms are a drag. Of note, the Swiss market is up 1.8% and this is sufficient to turn the market higher for the week. The manufacturing PMI rose to 57.4 from 51.9 and the new orders component rose to 61.6.

With Euorpean and US PMIs suggesting underlying strength at the start of Q3, global bonds have fallen out of favor. Bond yields across the board are higher, though the rise in Spain and Italy is marginal. Gilts are among the biggest movers, with the 10-year yield up 7 bp on the day and 16 on the week, making it the worst performing core bond market. US 10-year Treasuries yield is pushing back through 2.70% and barring a negative surprise from the US employment data, look poised to push through the early July high just above 2.75%.

Some observers are suggesting that yesterday's PMI is likely to be seen by the Fed as more evidence that they should taper in September. Yet, such a spin does not appear to do justice to the fact that the price component fell below 50 and this after the FOMC statement upped its concern about the persistently low inflation.

The 12- and 24-month average private sector job growth in the US are the same at 196. This speaks to the relative stability of this traditionally volatile time series. If anything, based on the weekly jobless claims and the employment component of the manufacturing PMI, the risk appears to be biased to the upside. That said, it still seems reasonable that the Fed may lower its threshold for higher rates from 6.5% unemployment rate to 6% when it decides to taper to drive home the message that tapering is not tightening. It would also be consistent with the transition for balance sheet driven monetary policy to forward guidance.

Source: U.S. Jobs To Cap Big Week