D-Day for NFP: Odds to Disappoint?

Friday September 1: Five things the markets are talking about

Will today’s U.S non-farm payroll (NFP) be able to move the market? Lately, it has been more about expectations and little about action.

This week’s ADP survey offered a positive surprise revealing that the U.S private sector added +237k jobs in August, beating market expectations of around +185k – it was the largest monthly increase in five-months, whilst the June’s print was also revised higher by +23k to +201k.

The correlation between the private report and granddaddy of economic indicators historical is not that strong, however, July’s NFP and August ADP would suggest that U.S employment sector has accelerated its recovery from previous strong levels.

The ‘but’ is that inflation data this week remains a concern for the Fed, which may suggest that even if we get a strong payroll report – a headline print above +180k this morning – it may not mean that a dollar advance is guaranteed. If due to some seasonal aberration, the headline print disappoints, less than +140k, then both the dollar and U.S yields could struggle on the first day of a new month.

The focus will be on today’s wage growth figures to gauge the outlook for Fed’s monetary policy in the months to come. Despite low unemployment and steady job creation, employee earnings have been stuck at a ‘modest’ rate for a long time, drawing caution from U.S policy makers.

Yesterday’s U.S personal consumption expenditures price index ex-food and energy, increased +1.4% in the 12-months to July – the smallest rise in 18-months.

Note: Most markets in the Middle East are closed today, while U.S and Canadian markets are closed Monday.

1. Stock rally in light trading

Global equities advance, with mining companies extending gains as industrial metals continued a rally fuelled by positive economic data surprises this week.

In Japan, the Nikkei share average edged up +0.2% overnight, echoing Thursday’s stateside gains, but trading was subdued as the market waits for U.S jobs data and its impact on the yen (¥110.08). The broader Topix was up +0.1%.

In Hong Kong, stocks hover over two-year highs on China strength and reforms. Both the Hang Seng index and the China Enterprises Index dripped -0.1%.

Note: The Hong Kong market has climbed for eight months in a row, encouraged largely by stronger-than-expected economic growth in China.

In China, stocks have edged up overnight to cap their third week of gains, supported by robust corporate earnings and signs of accelerated reforms of state firms. The blue-chip CSI300 index rose +0.2%, while the Shanghai Composite Index also added +0.2%.

In Europe, equities continue their march higher with positive corporate data helping drive sentiment. However, price action remains muted ahead of NFP and the U.S long weekend.

Futures on the S&P 500 Index have increased +0.1%, reaching the highest in more than three weeks on its sixth straight advance.

Indices: Stoxx600 +0.4% at 375.5, FTSE +0.2% at 7447, DAX +0.5% at 12117, CAC-40 +0.8% at 5124, IBEX-35 +0.5% at 10350, FTSE MIB +0.5% at 21775, SMI +0.1% at 8932, S&P 500 Futures +0.1%

2. Crude declines, as gasoline remains elevated, gold falls

Oil prices remain on the back foot in the wake of Hurricane Harvey, which has paralyzed over a quarter of the U.S refining industry.

Harvey shut at least +4.4m bpd of refining capacity, according to company reports. This has sparked fears of a fuel shortage ahead of the Labor Day weekend, and cut refinery demand for crude oil.

Benchmark Brent crude for November is down -40c at +$52.46 a barrel, while U.S light crude (WTI) is down -45c at +$46.78 a barrel. The contract rebounded +2.8% yesterday, but is still heading for a weekly decline of around -2%.

U.S gasoline prices hit a two-year high above +$2 a gallon on Thursday, settling up +25.52c, or +13.5% at +$2.1399 on the last day of trading in the September contract.

Note: The U.S government tapped its strategic oil reserves (SPR) for the first time in five years yesterday, releasing +1m barrels of crude to a working refinery in Louisiana.

Ahead of the U.S open, gold prices have inched lower (down -0.2% at +$1,318.81 per ounce) as mild profit-taking has set in after recent rallies and as market awaits U.S. jobs data for direction on interest rates, but safe-haven demand is keeping prices atop of their decade highs as tensions over North Korea linger.

3. U.S Treasury’s rise as weak inflation persists

U.S Treasury yields fell hard yesterday following the governments report on personal income and outlays for July. The yield on the benchmark U.S 10-year note has fallen to +2.12%, matching the low of late June.

The report showed consumer spending continuing to perk up (although not as much as expected) and personal income rising, but inflation falling well below the Fed +2% target.

Note: U.S 10-year yields have dropped -16 bps in August, the steepest monthly decline since June 2016. At the start of 2017, the market was preparing for yields to be almost +50 bps higher by now.

If U.S payrolls drop this morning (08:30 am EDT) as expected, reducing the chances of a rate rise by the Fed in December, they could push 10-year prices higher and this could also drag 10-year German Bund prices higher – the ECB meet on September 7.

Germany’s 10-year yield has declined -1 bps to +0.36%, while U.K 10-year gilts yields have rallied less than +1 bps to +1.034% ahead of today’s U.S payroll report.

4. Dollar steady ahead of U.S payrolls

USD is tentatively holding on to its recent gains as the market focuses on today’s non-farm payroll (NFP) report for clarity of a possible third Fed rate hike this year.

EUR/USD (€1.1892) is a tad lower in quiet trade. The pair has fallen over -250 pips off its recent three-year highs (€1.2069). The consensus does not think that the ECB will take to take any decision on trimming its asset purchases at next week’s policy meeting (Sept. 7). Dealers believe that QE would be phased out ‘slowly’ as the EUR’s rapid gains outright (+14% year-to-date) is worrying a growing number of ECB policymakers.

This morning, U.K August manufacturing PMI rallied to a four-month high of 56.9 – sterling (£1.2926) rallied after the release, though gains are limited, with markets focused on concerns over a lack of progress in the U.K’s talks with the E.U about Brexit.

5. Eurozone manufacturing PMI’s rise in August

Activity in the eurozone’s manufacturing sector increased last month to a joint 74-month high, led largely by the strong core of Germany, the Netherlands and Austria, a sign that the regions recovery remains strong.

The manufacturing PMI’s for the bloc rose to 57.4 in August, up from July’s reading of 56.6, and unrevised from the original flash estimate.

The summer surge in factory activity may suggest that rising goods production will support another strong GDP reading for Q3.

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