The Morning Hark - 2 Sep 2022
Today’s focus …….NonFarm Payrolls 13.30BST and US factory orders 15.00BST
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures have bounced in Asia trading currently at 93.85 and 88.00 respectively. Fresh lows for the week yesterday amid global slowdown fears and Chengdu lockdowns but those have abated somewhat with both now up around 1.5% on the day.
Today sees G7 finance ministers meet to discuss a Russian price cap which will obviously not go down well in the Kremlin. The official Russian stance is they will not supply energy to states that employ this tactic.
One headline to note from yesterday was the US deeming Iran’s comments on the nuclear deal as “unconstructive” after Iran had claimed there were trying to be “constructive”.
An early European headline states Nordstream confirm gas flows will be back from 2AM Saturday. Just in time for the price cap to take effect?
EQ - Equity markets in Asia have moved lower overnight post the US data with the Nikkei and Hang Seng at 27,675 and 19,290 respectively. The Kospi is basically flat at 312.50
US data yesterday showed a rise in PMI allied with a dip in prices paid. Could this be a sweet point for equities? And more importantly can it last?
The Nasdaq and S&P continued their slides in the immediate aftermath of the prints but closed on their highs at the end of the day. It brings todays number into sharp focus, and we wonder if the market is badly placed for a number that misses expectations.
Gold - Gold Dec futures slipped again Thursday with USD strength being the obvious headwind. It is stable in Asia this morning at 1711. It is currently in a 3-week losing streak and sits just above it’s support at $1695/1700. A weekly close below there should mean further losses next week.
FI – US treasuries punched through the upper levels yesterday post the data with 10yr above 3.29% and 2yr touching 3.55% Asia has seen some respite with them currently sitting at 3.24% and 3.49% respectively. US to Japan yield spread topped 300bp yesterday. The market is now pricing 73bp for the September FOMC meeting.
European yields followed suit yesterday but with the German and Italian 10y yield spread reaching 2.40% its highest level since the blow out in mid-June.
FX - USD is king again following the numbers yesterday with the market firmly pricing a 75bp hike for the September meeting. Bloomberg USD index hit a record high yesterday and USDJPY breached the 140 level.
Japanese officials had already spoken in the morning to remind the market that FX rates are being watched and excessive moves are not appropriate and that rates must reflect fundamentals. That jawboning has occurred 3 times now in 24 hours which is about as much intervention as you are going to get. Is it successful? Well, USDJPY just printed a new 24 year high at 140.43 so maybe they just need to say it again.
Meanwhile, Caixin reported analysts expect PBOC are showing support to the CNH around this 6.9000 level.
GBP dropped to a new 2 year low against the USD yesterday printing just below 1.1500.
Others - Bitcoin and Ethereum continuing to trade on the sidelines at 20,016 and 1593 respectively.
ISM thoughts and NFP on the horizon
ISM, and indeed the manufacturing PMI print, beat expectations and somewhat surprised the markets given the volatility we had seen in some of the regional surveys earlier in the month. Headline was a near full point beat at 52.8 with both the employment and new order measures printing not only higher but back above the 50 boom/bust level at 54.2 and 51.3. The strong employment measure takes on all the more significance given today’s data. Finally, the Fed got the full house of ticks with a further down tick in the prices paid element of the report to 52.5. All in all, from where we’ve been a strong report and one which did nothing to alleviate the pressure on US yields and the ailing stock market. Indeed the latest tracker for q3 GDP from the Atlanta Fed has us now at 2.6%. All fuel to the fire for the Fed hawks.
Today’s number of course will overshadow all that has gone before. Ahead of the US Labour Day weekend expectations are for 298k for the NFP headline number, with the unemployment rate holding steady at 3.5% and the wages element showing a slight down tick to 0.4%. If we see such a print, it’s not nearly enough for the Fed to be taking a 75bp hike off the table in a couple of weeks’ time.
Last month was a blockbuster with headline printing 528k (for context estimates were for a 250k print). Remember in the lead up to the number we pointed out that market forecasters have a strong bias for underestimating this particular number. Taking a look at what is estimated for this month we see a wide divergence in the estimates from Wall Street with a 452/75k spread.
Couple of words of caution on taking that “undercooked” approach again this month, and expecting a higher number than estimated, would be firstly there is a strong seasonality for August payrolls to miss to the downside. Approximately 80% of the last 20 years NFP headline numbers, for the month of August, have missed to the downside. Secondly would be any revisions to July’s numbers. Often when we see a large number, like we saw last month, there can be significant revisions to that number and more often than not to the downside. This should always be factored in when looking at this month’s headline as there may be some payback in the revision piece.
Taking the opposite view, a couple of prints yesterday would suggest however that the labour market, for now at least, remains strong. Initial claims for last week fell to a two-month low and at a level which would suggest no recession is in sight. Secondly as we highlighted above the employment measure in the ISM print saw a strong surge. You could even throw in the strong JOLTS report from earlier in the week which saw a big miss to the topside for job openings.
One final point to remember is the White House musings on employment these last few days where we have seen talk of a “cooling off” in job markets. Worth bearing in mind especially with their earlier silence and then talking up of the inflation prints.
So where does that leave us on the day. Given the 298k estimate and with the theory that “a bad report is a good report” we believe that only a number in the 200k zone will shift market sentiment enough to make the 50/75bp hike argument more of a 50/50 call with focus then shifting to CPI on the 13th.
A number below 150k and we would expect US yields and the USD to sell off and the equity market to see some much needed relief from its travails post Powell.
If we get 350k then its good night equities!
Whatever the number is good luck and I hope it treats you well but keep a close eye on the revisions when placing the headline number in its full context.
For a more macro view on payrolls I post at the bottom an excellent twitter thread from Eric Basmajian from EPB Research who delves deeper into the make up of the US employment report and lays out, very clearly, the relationship between the US economy and the employment sector and why we have been seeing a slowing economy whilst the labour market remains robust. Well worth a read ahead of today’s report.
One final thing to flag are the early prints on Monday for the final services PMIs for August.
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US NFP Aug consensus 298k vs previous 528k (13.30 BST)
US Unemployment Rate Aug consensus 3.5% vs previous 3.5% (13.30 BST)
US Average Hourly Earnings MoM Aug consensus 0.4% vs previous 0.5% (13.30 BST)
US Factory Orders MoM Jul consensus 0.2% vs previous 2% (15.00 BST)
Australia S&P Global Services PMI Final Aug previous 49.6 (00.00 BST)
Japan Jibun Bank Services PMI Final Aug previous 49.2 (01.30 BST)
Australia Retail Sales MoM Final Jul previous 0.2% (02.30 BST)
China Caixin Services PMI Final Aug previous 55.5 (02.45 BST)
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