NFP preview

 

Nonfarm payroll thoughts from Goldman Sachs, in brief

  • GS is forecasting +165,000
  • Would be higher but for the strike at Verizon (GS cite the Bureau of Labor Statistics; the BLS attributes a minus 35,100 workers impact during the survey period)
    For the U3 unemployment rate, expected to fall to 4.9% ("although risks look tilted to the upside")
  • Average hourly earnings likely rose at a trend-like pace of 0.2%
 

APAC Currency Corner – Will NFP provide the magic bullet for the US dollar?

Following up on  Wednesday’s unexpectedly strong Q1 GDP report, Australia printed a much narrower-than-expected trade deficit of AUD1.6bn in April – the smallest in 14 months. But surprisingly the data failed to inspire. The Aussie dollar has had a difficult time this week capitalising on strong domestic data. Instead, traders continued to fade positive economic news knowing the RBA’s primary trigger is inflation. While recent data points to a positive outlook for the local economy it does not lead to any turnaround in inflation.

With inflation clearly in the RBA’s crosshairs, it is more likely that only a positive shift in inflation metrics will inspire traders to take the Aussie aggressively higher. Expect the Aussie to perform mixed over the short term on the back of broader US dollar movements, in particular with the market driven by event risk. However, we should not lose sight of the RBA current inflation-focused mandate. Overnight we saw the Aussie move lower on the back of broader US dollar strength after investors sold the Euro as ECB President Draghi failed to inspire.

  

Oil – recovers after inventories drop

On the OPEC front, despite all the headlines, there is no production freeze and no subsequent talk of one.  While WTI initially sold off below $48.00, it has since fully recovered after the Department of Energy inventory report, which indicated stocks fell by 1.37mn barrels, halted the slide and has offset the OPEC-induced price slump.

   

Yen – stimulus no-show

Equity markets have done moderately well overnight with the S&P500 closing up 0.3% after opening in the red only to reverse those losses. However, the Nikkei was the exception falling 2.3%. Investors expressed disappointment over the lack of urgency on the stimulus front after PM Abe indicated large-scale economic stimulus will likely come in the autumn. The market was expecting some type of coordinated effort between the BoJ and Tokyo. Traders are now pricing in diminishing expectations that the BoJ will ease this month, which continues to weigh negatively on USDJPY. We’re liable to hold consolidation patterns through to tonight’s all-important non-farm payrolls (NFP) data out of the U.S.

   

Yuan – still buying on dips

While the offshore USDCNH fell yesterday, the general buying-on-dips theme has not changed given the Fed rate hike seems to be a definite in either June or July. I expect a sleepy Friday session as traders sit tight ahead of tonight’s NFP. There are growing signs of more turbulence as according to data compiled by Bloomberg, mainland Chinese traders piled into Hong Kong equities at the fastest rate in more than one year. Mainland traders bought a net 21.9 million of shares listed on the city’s stock exchange in May. Risks are indeed increasing that capital outflows will accelerate to January’s, or even last August’s levels as the Yuan depreciation accelerates.

Today’s Fix 6.5793 vs 6.5688
 

Wall St in Waiting Mode as Crucial Non-Farm Payrolls Loom


US equity futures were struggling for direction on Friday ahead of the crucial jobs report that is expected to be the major market mover, as it may suggest whether the rate hike will come this month.

Futures for the Standard & Poor's 500 index ticked 0.03% lower to trade at 2,103.20 ahead of the market open.

All eyes are on the US non-farm payrolls report that is expected to unveil 160,000 new jobs in the US economy in May, which would be the same figure as a month before. However, some analysts warn the number could go even lower due to the Verizon strike.

"If the jobs number drops sharply to 130K or anywhere near that, quite possible given the Verizon strikes and the slowdown in manufacturing hiring, then any prospect of a move in rates in June, already seen as fairly low, could well diminish further," Michael Hewson at CMC Markets said.

The consensus for the unemployment rate points to a slide to 4.9% last month, but some economists say the rate will remain unchanged at 5%.

Average hourly earnings are expected to grow 0.2% on a monthly basis, after a 0.3% rise before, while growth of 2.5% is forecast on the year, the same as in April.

The Federal Reserve (Fed) is due to meet on June 14-15, with the markets preparing for the scenario of a rate hike, even if some believe the central bank will wait until at least July to collect more economic data and to see the result of the EU referendum in the UK scheduled for June 23.

Chicago Fed President Charles Evans said on Friday that Brexit uncertainty can make it harder to invest, and added the timing of a rate hike is not that important.

He also said that two more rate hikes are possible during this year, and that economic conditions are seen improving, while the US will need three years to reach the Fed's inflation goal.

"Two rate hikes in 2016, that's my own call for that, if the data continue to be in line with my outlook, that's a slow and gradual increase this year," Evans stated.

Looking ahead, Fed Governor Lael Brainard is scheduled to speak later on Friday.


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APAC Currency Corner – Caution is the name of the game

The US dollar posted modest upticks against the G10 currencies in the New York session. USD bulls found solace in yesterday’s US initial jobless claims, which fell to a lower-than-expected 264k last week, lowering the four-week average by 7k to 270k. The weekly employment barometer certainly paints a more robust picture of the US labour market compared to last Friday’s gut-wrenching Non-Farm Payroll numbers. Those in support of a near-term Fed hike breathed a collective sigh of relief.

Global markets remain on edge as the UK’s EU referendum uncertainty casts a shadow. WTI continues to slide lower, and equity futures are struggling, and hard commodities are coming off the boil keeping USD supported with the Australian dollar looking a bit worse for wear this morning.

 

YEN – stimulus package may be back on radar

We’ve had a solid rebound after testing the 106.35 depths and are now testing above 107.0USDJPY. This is being driven by the surprising US initial jobless claims. as the market was very much short USD at time of release.  But given the fragile and erratic nature of this report, I would not hang my hat on that report.  However, the USDJPY continues moving higher in early trade on the back of broader USD moves in early trade. But given how sparse the economic diary is, I am not expecting any drama today but  definitely worth keeping an eye on risk sentiment.

The one data point from this week that should attract Japan’s policymakers’ attention was the decline in Japan’s machine order, which plummeted 11% in April. Given this staggering decline, we may start to hear more rhetoric about the fiscal stimulus, which could lend a hand to the higher UDJPY argument.

  

YUAN – trading light in holiday season

With Mainland China and HK markets on holiday yesterday, the turnover in CNH has been very light. The well-documented macro themes remain in place, but the market continues to show two-way interests with activity primarily centred on the Fix. Curve wise, the front-end continues to trade loose and, despite some weaker data earlier in the week, there was very little concern expressed in this quiet holiday period.

I expect a continuation of broader USD sentiment to dictate the pace of trade leading into weeks end.

  

MYR

Risk off sentiment saw reversals across much of EM and commodity basket.  Oil was trading back toward the $ 50.00 mark, which in itself should provide a floor on USDMYR today. Also the fall in US bond yield is suggesting investors are opting for the relative safety of less risky assets and this should weigh on near term sentiment.

 

Aussie – rollercoaster ride continues

After a very impressive run to 0.7500, the Aussie has come under steady pressure during the NY session on the back of the risk aversion concerns. Australian dollar traders are well versed in rollercoasters and given that Q2 CPI data remains the key, the 0.7500 level was always going to be a huge hurdle for subsequent Australian dollar appreciation, risk aversion or not.

US equities should remain supported in the near term by recent dovishness from the Fed. However, the elephant in the room for risk sentiment is Brexit, which is just too much of a wild card to call. With nerves frazzling as we near the UK’s historical referendum, Aussie dollar bulls will likely find themselves running up the down escalator over the next week or two. Keep any eye on this current reversal, as risk sentiment is likely to remain fragile until the June 23rd crunch date.

  

NZD – Kiwi rockets against major currencies

The RBNZ appears in little rush to cut rates and Governor Wheeler may want to keep his powder dry like other central bankers have done. Or he believes that in this global low-interest rate environment, monetary policy has a very limited influence to guide exchange rates lower in a constructive way. Whatever his thinking, the New Zealand dollar rocketed higher against the USD and all the major crosses. In fact, the AUDNZD broke south of the fundamentally key 1.050 levels. Given how fragile the hard commodity recovery remains, coupled with soft commodities like milk products surging, a move lower in the AUDNZD cross is in cards.