What to look for in U.S payrolls (NFP)

Friday February 2: Five things the markets are talking about

The U.S labor department is expected to report that 2018 has kicked off with a pickup in hiring.

Market consensus is looking for non-farm payrolls (NFP) to rise by +180k last month, while the unemployment rate continued to hover atop of +4.1% – its lowest level in 18-years.

What to look for in today’s payrolls report:

More hiring

The pace of job creation has been slowing as the U.S economy encroaches on full employment. Employers added an average of +171k jobs a month in 2017. After a slightly softer December (+148k), the market expects todays jobs report to rebound to around its recent trend.

Steady unemployment

The U.S unemployment rate is expected to remain atop of +4.1% last month. Fed officials continue to monitor domestic wage and price pressures, and a falling unemployment rate supports their expectation that tighter labor market will eventually boost inflation.

Note: Fed policy makers’ median projection in December saw the jobless rate dipping to +3.9% by late 2018.

Wage Growth

The biggest surprise in 2017 was that U.S wage gains actually softened after two consecutive years of gains. Average hourly earnings for private-sector workers were up +2.5% in December y/y, but down from +2.9% annual growth at the end of 2016. Minimum-wage increases in many states should help boost earnings for January.

Housekeeping matters

As is typical for the January jobs report, today’s release will include a number of routine changes from the Labor Department. New population controls mean the household-survey figures for the number of employed and unemployed will not be directly comparable between December and January.

The payrolls data will include an annual benchmark revision – roughly +4% of payroll employment will be “reclassified” by industry due to the adoption of updated classifications.

1. Stocks see red as yields back up

In Japan, the Nikkei share average fell overnight on weakness in most sectors, with banking stocks down on worries that JGB bond yields would be kept low after the BoJ conducted a special bond purchase operation to curb rising yields. The Nikkei dropped -0.9% while the broader Topix shred -0.3%.

Down-under, Australia’s S&P/ASX 200 Index rose +0.5%, supported by higher commodity prices. In S. Korea, the Kospi index declined -1.7%.

In Hong Kong, the Hang Seng Index ended Friday marginally down, but posted its biggest weekly loss in two-months, pressured by rising sovereign bond yields. At the close, the Hang Seng index was down -0.12%, while the Hang Seng China Enterprises index rose +0.78%. For the week, the Hang Seng lost -1.7%.

In China, stocks reversed earlier losses and ended higher on Friday, supported by gains in resources firms. Nevertheless, regional indexes still posted hefty weekly drops, led by the Shanghai benchmark index, which posted its worst week in 14-months. At the close, the Shanghai Composite index was up +0.5%, while the blue-chip CSI300 index was up +0.6%.

In Europe, regional indices continue to trade lower with the German DAX registering another -1% decline as rising sovereign rates and mixed earnings continue to weigh on equity markets.

U.S stocks are set to open in the “red” (-0.7%).

Indices: Stoxx600 -0.9% at 389.8, FTSE -0.3% at 7466, DAX -1.4% at 12822, CAC-40 -1.2% at 5390, IBEX-35 -1.3% at 10264, FTSE MIB -1.1% at 23279, SMI -0.7% at 9229, S&P 500 Futures -0.7%

2. Oil prices extend gains on compliance with output cuts, gold lower

Crude oil prices are rallying for a third consecutive session after a survey showed strong compliance with output cuts by OPEC and others including Russia. It’s currently offsetting market concerns about surging U.S production.

Brent futures are up +24c, or +0.3% at +$69.89 a barrel, while U.S West Texas Intermediate (WTI) crude is up +33c or +0.5% at +$66.13 a barrel.

A Reuters survey this week showed that production by OPEC rose in January from an eight-month low as higher output from Nigeria and Saudi Arabia offset a further decline in Venezuela and strong compliance with a supply reduction pact.

Stateside, an EIA report Wednesday disclosed that U.S crude output surpassed +10m bpd in November for the first time in nearly half a century.

Gold has edged lower ahead of the U.S open, under pressure from a stronger USD outright. Investors will take their cues fro today’s NFP report. Spot gold is down -0.3% at +$1,345.22 an ounce.

3. Global bond yields break higher

Overnight, the Bank of Japan (BoJ) again conducted a fixed-rate JGB purchase operation (the fourth time performed). Japanese officials offered to buy unlimited amount of 10-year JGB’s at +0.11% in an attempt to control their yield curve. The BoJ said its action to cap rises in bond yields was consistent with the central bank’s current easy monetary policy.

The market is also taking a look at bund yields – higher yields stateside seem justified, given expectations of further rate increases by the Fed, but rising yields in German Bunds seem to be ‘out of sync’ with ECB policy. The ECB is set to remain a “net” buyer of bonds until at least September 2018 and isn’t expected to raise policy rates until 2019.

The yield on U.S 10-years has gained less than +1 bps to +2.79%, the highest in almost four-years. In Germany, the 10-year Bund yield has climbed +2 bps to +0.74 percent, the highest in more than two-years, while in the U.K, the 10-year Gilt yield increased +5% bps to +1.531%, its highest yield in 21-months. In Japan, the 10-year yield has declined -1 bps to +0.086%, the largest drop in 11-weeks.

4. Dollar comes up for air

With higher sovereign bond yields supporting a number of higher currency values, both the ECB and BoJ are beginning to show increasing uneasiness around the recent appreciation of their respective currencies (€1.25 and ¥109.87). The somewhat ‘outlier’ to higher domestic yield has been the USD – it cannot seem to rely on rate and yield differential for solid support.

EUR/USD continued to probe the psychological €1.25 level area on removal of stimulus expectations, but the ‘single’ unit seems unable to sustain any momentum through this key resistance point. ECB officials have upped its rhetoric on volatility concerns. EUR bulls continue to look at pullbacks to add to current ‘long’ positions.

The BoJ’s commitment of keeping its 10-year yield fixed despite rising upward pressure on global yields might allow 10-year yield differentials to move against the JPY. For now, JPY is confined to its ¥107-112 range.

GBP (£1.4216) is trading softer ahead of the U.S open after a weaker U.K Construction PMI print (see below) and housing activity contracting for the first time in 17-months.

Last December, bitcoin appeared to be marching toward $20,000/coin after climbing as high as $19,511 on Dec. 18. Since then, the cryptocurrency (BTC) has plummeted -56%, leaving it just above $8,000.

5. UK Construction PMI falters

Data this morning showed that U.K activity in the construction sector eased to a four-month low at the start of this year.

Markit’s U.K’s purchasing managers’ index for the construction industry fell to 50.2 in January, down from 52.2 a month earlier – the figure was just above the 50.0 no-change mark, suggesting only a fractional rate of growth.

Digging deeper, concerns about the U.K.’s economic outlook has weighed on new orders, with residential building activity contracting. Cost pressures remain intense, fuelled by shortages of input materials and high costs for imported products.

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