Investors continue to look for signs that the U.S. economy remains on solid ground, and today’s ‘granddaddy’ of all fundamental releases, non-farm payrolls (NFP), will provide a fresh glimpse of the health of the U.S economy.
Last month’s employment print showed that the U.S added only +38k jobs in May, the worst month in nearly six-years. Today’s June report (expected +180k, +4.8% unemployment rate) could either suggest last month’s weak jobs number was an outlier print, or confirm a pattern of employment growth losing momentum.
Yesterday’s U.S ADP report was better than expected – this has reduced some of the nervousness about today’s employment release. Also boosting market optimism are Thursday’s U.S weekly claims coming in less than expected, suggesting the job market could be rebounding. Claims were a seasonally adjusted to +254k below the +267k expected.
However, if we do get a strong report, then there is the Fed and their concerns about global conditions. Wednesday’s FOMC minutes showed that U.S policy makers remain divided on the path for interest rates. Fed fund futures suggest no hikes currently been priced in for this year.
1. Global equities mixed ahead of jobs report
Euro bourses are generally trading higher as Brexit fears continue to ease, and as market participants await the release of NFP in a few hours. It’s a natural reaction for the market to taken some profit off the table ahead of today’s print.
Banking stocks are leading the gains in the Eurostoxx with the Italian peripheral lenders notably trading higher in the index. Construction and homebuilder sector are leading the gains in the FTSE 100. Commodity and mining stocks however trading notably lower after a significant sell-off in both WTI and Brent contracts in yesterday’s trading.
In Asia trade it was a different matter – the main indices saw red as stocks in Asia closed lower, weighed by the losses in oil prices. Japanese stocks fell -1.1%, while stocks in Hong Kong fell -0.7% and stocks in Shanghai fell 1%. Australian shares were little changed.
Indices: Stoxx50 +0.6% at 2,798, FTSE -0.1% at 6,527, DAX +0.8% at 9,489, CAC-40 +0.5% at 4,137, IBEX-35 +1.1% at 8,097, FTSE MIB +1.9% at 15,728, SMI -0.2% at 7,946, S&P 500 Futures flat
2. Political risks becoming a headache for BoJ
Given escalated concerns over the fallout from the U.K.’s Brexit vote, today’s jobs report should have a massive impact on the ‘risk haven’ yen currency (¥100.65). More bad news on the U.S. economy will definitely strengthen investors’ argument to support their “flight to quality.”
The recent forex volatility has prompted comments from various Japanese politicians and policy makers, noting the government continues to closely watching the FX markets with urgency and will “act promptly if there are speculative moves.”
With the yen encroaching on such key levels – overnight, JPY was back trading within +30pips of the psychological ¥100.00 handle outright, a level last breached two-weeks ago on Brexit Leave vote panic – investors need to be aware of the BoJ’s presence.
With political risks in the U.K and Australia dominating the headlines as of late, Japan’s upper house elections over the weekend should bear close watching.
3. Crude rebounds from two-month low
Oil prices have rebounded small ahead of the U.S open, coming off yesterday’s two-month lows print – WTI/Brent fell approximately -5% on news that the U.S. weekly crude draw missed forecasts. EIA stocks fell by -2.22m barrels to +524.35m barrels – a lower withdrawal rate than expected.
Investors should expect the outlook for oil trading to remain volatile for a number of reasons, first, possibility of a product glut, second, slowing economic growth concerns and third, the possibility of further supply disruptions could tighten supplies (Nigeria and Iraq).
Currently, Brent crude futures are trading at $46.75 per barrel up +35c, or +0.8%, while WTI is up +29c, or +0.6% at $45.43 a barrel.
4. What do China’s reserve numbers mean?
China released its June foreign reserves overnight that showed the biggest increase in 14-months to $3.21T.
Does a print like this suggest that the People’s Bank of China (PBoC) has exited its regular currency market intervention and is allowing the yuan to weaken? Not necessarily so.
One reason for the uptick is that inflows to the country outpaced outflows, the first time since April 2014. There is ongoing evidence that Chinese authorities continue to defend the renminbi – the discount of the offshore yuan to the onshore rate widened last month.
For capital market, it’s difficult to put too much emphasis on one benchmark print; it’s not a trend. Historically, the PBoC is rather “opaque” in how it values reserves and that includes how it qualifies asset values to the market.
The market will try and not read too much into this one print – things should become clearer when the PBoC publishes its net forex purchases later this month.
5. Sovereign bonds to be closely watched
Today’s jobs report could have a significant impact on sovereign bond yields. The bond market has become “technically” expensive after the post-Brexit rally, and this despite the minor correction in the past two-days.
Both fear and concerns for global growth has fixed income product trading like a “hot commodity.” The market has witnessed record low yield prints for a number of Tier 1 debt – U.S 10-year Treasuries have fallen -38bps in three-weeks to yield +1.33%. German Bunds are trading in deep negative territory -0.21%; while U.K gilts yield has plummeted to +0.78%. In Japan, 20-year JGB’s fell below zero for the first time.
A strong headline NFP print (watch the revisions) could see fixed income dealers backing up yields, especially in the short end, very fast indeed as dealers again reassess the Fed’s tightening rate policy pace.
Currently, Fed funds futures are not pricing in a Fed hike for 2016.