Will NFP Contain The Dollars Move?

Friday June 3: Five things the markets are talking about

The ECB did nothing, OPEC did nothing, and ADP signalled another month of acceptable U.S job gains.

So what left to look forward to? Today it’s non-farm payrolls (NFP)-the granddaddy of fundamental indicators.

This key reading could help determine the course for interest rates in the world’s largest economy. Investors seem hesitant to make any ‘big’ bets across the board in the run up to this morning’s release (08:30 a.m. EDT).

The Fed has been open and transparent in their rhetoric of late. They are a tad ‘hawkish’ to a rate hike, but it’s all data dependant. NFP is the final major release on the U.S. labor market before the Fed’s June 15 meeting.

A strong report could encourage Fed officials to raise benchmark interest rates this summer for the first time this year. Currently, Fed funds futures are pricing a +20% probability for a hike rate in a few weeks.

1. What the Fed needs to see in NFP

Investors and dealers continue to search for clues for any re-pricing of Fed policy expectations.

Dollar bulls require a U.S’s jobs report to show healthy job additions, higher wage growth and a labor participation rate showing some traction.

However, with the U.S consistently ticking the job growth box for the past year, the market has naturally shifted its focus to wage growth. To date, the U.S’s impressive growth in jobs has generally not translated to meaningfully higher wages. Any improvement in pay, along with a gradual recovery in the labor participation rate, is expected to lead to higher consumption.

The U.S still needs to move the needle on wages. Average hourly earnings need to show a monthly gain of +0.2% and then some. Anything on the “positive” side will have fixed-income dealers repricing current yield curves.

Then there is labor-force participation. The U.S participation rate continues to hover near its historical lows – 62.6%. It’s healthy to see it edge higher even if it does happen to push the unemployment rate up (+4.9%).

The dollar is trading in a contained range ahead of the release. Market consensus is looking for payrolls to have risen by +158k in May (note: some analysts expect the number to be depressed due to the Verizon strike).

A print there or there about could see some modest dollar strength. The event risk is that the data disappoints.

2. Dovishness dominated ECB meet

There were no surprises in yesterday’s ECB policy decision. Draghi and company remains in ‘wait-and-see’ mode. Their corporate bond buying program and the new round of targeted long-term refinancing operations will begin this month.

The one surprise to dealers and investors was policy makers keeping their medium-term inflation projections unchanged. In his press conference Draghi indicated that officials have shifted their focus elsewhere, namely to the looming Brexit vote (June 23) and the incomplete re-pricing of the Fed outlook. Both of these event risks will keep markets occupied over the coming weeks and not the ECB.

3. OPEC full of ‘hot air’

OPEC failed to agree on a new production ceiling at its semi-annual meeting in Vienna yesterday.

Heading into the summit, the Saudi’s, Kuwait and Qatar supposedly were leaning towards a renewal of an OPEC output ceiling, while others such as Iran, Venezuela and Algeria were insisting that an output ceiling must be accompanied by a country-specific quota system. It’s not a surprise that self-interest won the debate.

Crude prices initially came under pressure on the news, but have found traction (WTI $49.19, Brent $50.09) ever since on the back of the weekly U.S. crude inventories and production data by the EIA reporting a steady decline in stocks (-1.4m barrels drawdown).

Mohammed Barkindo from Nigeria was chosen to be OPEC’s new secretary general.

4. PMI’s from China slow

In the overnight session, China’s Caixin Services and Composite PMI’s slid to a new three-month low (51.2 vs. 51.8 prior), but remained in expansion territory.

Digging deeper, there were reported declines in the new-orders component, marginal job creation, and rising volume of unfinished work.

Analysts noted that easing cost pressures in the PMI gauges also do not bode well for upcoming official May inflation figures – all of the index categories, except output prices, showed signs of deterioration. This suggests that the Chinese government needs to continue with their policy steps to boost its economy.

In Hong Kong, May’s composite PMI contracted for the fifteenth consecutive month (47.2 vs. 45.3), but at a slower pace. Output, new orders and employment components all fell at softer rates.

5. Yen at risk to go higher

Thus far, the fallout from PM Abe’s decision to postpone his sales tax hike appears to be contained.

All three major credit rating agencies have expressed varying amount of caution, though only one (Moody’s) was ‘most’ concerned, stating it considers the decision as a credit negative.

Overnight, Japan May services PMI returned to expansion at 50.4. Growth was supported by a modest increase in new orders for the second consecutive month. Even employment remains in growth territory.

However, Japan’s deflationary trend continues. A concern for the BoJ was that input prices rose to the weakest rate in over three-and-a-half years.

The yen is trading atop of its three week high (¥108.60) on the sales tax decision. Traders are looking at this latest move as a fiscal step that could potentially detract from more aggressive BoJ policy moves in the second-half of the year. If the BoJ is out of the equation, it would suggest that Yen is at risk to go much higher.

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