Risk Assets Lower in Quiet Trade Ahead of US Non-Farms Payrolls Report
SUMMARY
STOCKS: On Thursday stocks in Asia finished mixed-down, Europe was up, the US down. Generally, risk currencies were down, commodities flat. The consensus of FX dealers appeared to be that market sentiment remained upbeat and this would continue unless the employment report held any negative surprises. But the impact of the day's data could be limited ahead of the Federal Reserve's policy meeting next Tuesday and Wednesday, they said. Data on Thursday that showed the number of U.S. workers filing for first-time jobless benefits fell sharply in the week to Aug. 1 whetted investors' appetite for more good news on the jobs front.
FOREX: Risk currencies generally down against riskier ones, GBP plunges on unexpected additional QE decision from BoE. While the BoE left rates unchanged at 0.5%, it increased its bond buying program in order to add additional liquidity to the UK economy, which traders feared could ultimately undermine the value of the GBP. Thursday's other main FX event, the ECB announcement, contained no changes to current policies.
COMMODITIES: flat ahead of US NFP report (DOJI STARS) [Crude Oil $71.62, -0.44%, Gold down slightly to $961, +0.03]. Both of these are now also, along with other risk assets, near multi month highs, catching up to stocks which were flat, showing consolidation ahead of NFP
SPECIAL NON FARMS PAYROLL SECTION: Friday brings the week's main economic event, US non-farms payroll data. The U.S. economy is expected to have lost 320,000 nonfarm payroll jobs in July, a hefty number but still an improvement over last month's drop of 467,000, while the unemployment rate is expected to have risen to 9.6 percent. Data will be released at 12:30 GMT.
Arguably, the results could spark significant moves in all markets no matter how they turn out. If they disappoint, markets would be likely to pull back, as they did after July's announcement. If they are in-line or surprise to the upside, then markets could either rally higher. Alternatively, traders could decide it's time to take profits, since that could simply be seen as confirmation of the recession easing, which has largely been priced in already given the past weeks' rally. See below for more on the NFP report.
STOCKS
THURSDAY Asia mixed. EUROPE: UP (FTSE: +0.93%, DAX +0.32%, CAC 40 +0.56%) US: down (S&P -0.56% NSDQ -1.00 % Dow -0.27% )],
FRIDAY MORNING: Asia towards close: DOWN (N225 -0.81 %, HS -1.60%, ST -1.37%),
In the US, for the second straight session stocks saw a relatively solid start turn into a loss, but this time the financial sector joined the broader market in negative territory. Despite two consecutive losses, the broader market is still up 1% week-to-date. Should the gains hold through Friday's action, the stock market will have logged four consecutive weekly advances.
FOREX
SUMMARY
General:. Risk fx flat/down w/ stocks, commodity and higher yielders doing worse against lower yielders, exception, USD down or flat against these, underperforms other safety currencies. SEE OTHER HEADLINES-FX for details.
· The EUR See General. See OTHER HEADLINES-FX for details
· USD: See General. See OTHER HEADLINES-FX for details The dollar edged lower against a basket of currencies in a subdued market on Friday with investors largely staying on the sidelines ahead of key jobs data in the United States.
· CAD: See General. See OTHER HEADLINES-FX for details
· JPY: See General. See OTHER HEADLINES-FX for details.
· CHF: See General. See OTHER HEADLINES-FX for details
· GBP: drops hard (about 100+ pips after surprise BOE increase in QE See General. See OTHER HEADLINES-FX for details, but steady in early morning trade in Asia, drop seems done for now.
· NZD: See General. See OTHER HEADLINES-FX for details
· AUD: See General. See OTHER HEADLINES-FX for details
OTHER HEADLINES-FX
· EUR: ECB uneventful, German factory orders up 4.5% vs. 0.6% forecast and 4.4% prior. The ECB kept the official rate unchanged and did not introduce any new policies. ECB President Trichet was cautiously optimistic on the economic outlook as he said there are increasingly signs that the global recession is bottoming out. But despite a better "mood," Trichet said the economy will be weak for the remainder of the year and that they will continue to exercise caution. Trichet said there was no intention at all to change the total purchase amount for covered bonds, in contrast to the BoE's decision to expand its asset purchases, but did not say, once again, that the 1% in the official rate is the floor. Although Trichet sounded less dovish than we expected, it also does not mean that they will embark on any policy shifts anytime soon. Banking concerns still persist in the Eurozone and economic data will continue to be choppy. We still do not think the euro is the preferred vehicle to express growth views in the current environment.
· USD: The dollar edged lower against a basket of currencies in a subdued market on Friday with investors largely staying on the sidelines ahead of key jobs data in the United States. Nonfarm payrolls ahead. Our economists are expecting -250k as the consensus figure has been slowly moving closer to their estimate, from -345k last week to -325k currently. Even as expectations have been turning to a less negative number, our economists also note that recent disappointments in non-manufacturing ISMs and ADP could temper positive surprises for the payroll figure. Initial jobless claims, though, were lower than expected at 550k versus consensus 580k. Risk sentiment continues to drive currencies and continued improvement in payrolls could keep risk appetite supported and maintain pressure on the dollar.
· GBP: BoE increases asset purchase programme The Bank of England today increased its asset purchase program by a further 50bn to a total of 175bn. In their communique they say they expect the extra 50bn to take 3 months to complete. In terms of the technicalities of permission for further QE, this time they just asked for the increase, versus the previously "permissioned" 125bn. Today's announcement suggests that the MPC is now back in the familiar quarterly Inflation Report cycle mode and away from the fire-fighting stage that characterised many of its actions over the past 12 months. By slowing the pace of asset purchases the committee is indicating a phased withdrawal. If correct, the committee could expand further, possibly by another 25 billion in November, but this will depend on market conditions at the time. Although the MPC is encouraged by recent growth data the committee is conscious that the turnaround is fragile and also dependent on the various macro and micro initiatives undertaken by the government and the BoE.
· CAD: Labour data due . The labour market will likely remain weak even as the BoC forecasts the end of the recession for the third quarter. The unemployment rate is expected to increase from 8.6% to 8.8% with a -15k net change in employment. The Ivey PMI will also be released and consensus is for a drop from 58.2 to 54.0. While the PMI is above 50, the decline would contrast the recent momentum we have seen in PMIs elsewhere. USDCAD has stayed above 1.07 following Finance Minister Flaherty's recent comments and ahead of the US and Canadian labour data releases. More relative weakness in Canada's data could keep USDCAD supported.
· AUD: down The Australian dollar rose briefly after the Reserve Bank of Australia, which raised its growth forecast in a quarterly monetary policy statement, said interest rates could be expected to rise to more normal levels over time should the economy continue to improve. "Among industrial nations Australia has higher interest rates. A view that its economy will benefit from demand from China, whose economy is supported by stimulus measures, is making investors tend to flock to the Aussie," said Ayako Sera, a market strategist at Sumitomo Trust & Banking. That said, a full-fledged recovery in the global economy needs a recovery in the United States," she said.
COMMODITIES
· CRUDE: Oil edged down on Friday from a six-week high in the previous session, as markets awaited U.S. July employment data later on Friday, a major indicator of how well the U.S. economy is doing pulling out of recession. Oil prices are heading for a fourth straight week of gains as an improvement in the economic mood boosts riskier assets and knocks the dollar, but with high crude inventories showing demand remains weak, investors will want to see further signs that economic growth is returning..
· GOLD: see summary.
OTHER HEADLINES (Bloomberg)
King Raises Stakes in Bank of England's `Gamble' to Revive British Economy
Trichet Says Rising Joblessness May Damp Recovery in 16-Nation Euro Region
More on the US Non Farms Payroll Report
The state of the U.S. labor market is critical to not only the outlook for the U.S. economy but also the global economy. The dollar has been trading near year to date lows against most of the major currencies and with the forecasts for payrolls ranging from -150k to -460k, volatility is practically assured. The hesitation that we are seeing in the foreign exchange market Thursday indicates that currency traders are waiting for the payrolls report before deciding to add or cut their short dollar positions. The market currently expects job losses to ease to -328k but the whisper number is as high as -200k. Even though we also expect the non-farm payrolls report to improve, there is a good chance that it may not be as positive as the market expects.
Why Non-Farm Payrolls Could Disappoint
The labor market has been the Achilles heel of the U.S. economy for the past year. Since January 2008, the Bureau of Labor Statistics has reported back to back job losses. July is expected to mark the 19th consecutive month of negative job growth. It is encouraging that job losses are off their peak of -741k but the unemployment has grown from 4.9 percent in January 2008 to 9.5 percent in June. By the end of the year, the unemployment rate could break 10 percent. Yet economists across Wall Street believe that the number of job losses last month could easily have been less than 300k and possibly even less than 200k. The primary reason for this optimism is because weekly jobless claims are well off their highs. Less and less people have been filing for unemployment benefits which would suggest that fewer people lost their jobs in the month June.
However, there are plenty of reasons why job losses could be closer to 350k and 400k. We always look at the employment component of service sector ISM as a leading indicator for non-farm payrolls. Over the past 10 years, the index has had an unbelievably strong 87 percent correlation with non-farm payrolls. Therefore the drop in the index suggests that the NFPs could be closer to the lower end of the forecasts. Consumer confidence also deteriorated last month while strike activity increased. The number of online ads last month fell as well but that was partially attributed to seasonal trends.
The reason why we believe that job losses may still be good, just not that good is because the 4 week moving average of jobless claims have fallen from 616k to 555k. Challenger Gray and Christmas reported the second monthly drop in layoffs while private sector payroll provider ADP reported the fewest job losses since October 2008. Here are 10 leading indicators for non-farm payrolls and here are how the numbers stand ahead of Friday’s report:
Arguments for Stronger Payrolls Report
1. ADP Reports Fewest Private Sector Job Losses since October 2008
2. Challenger Reports Second Monthly Drop in Layoffs
3. Manufacturing ISM Employment Component Rises to Highest Level since August
4. 4 Week Moving Average down from 616k to 555k
5. Continuing Claims at 6.31M vs. 6.724M
Arguments for Weaker Payrolls Report
1. Service ISM Employment Component Falls from 43.4 to 41.5
2. Consumer Confidence Falls from 49.3 to 46.6
3. University of Michigan Confidence Falls from 70.8 to 64.6
4. Strike Activity Rises by 2,400
5. Monster.com Employment Index Falls 3 Points
What Is the Market Expecting?
Here are the forecasts for the July Non-Farm Payrolls Report:
How to Trade the Non-Farm Payrolls Report
The levels to watch for the non-farm payrolls report may well be -250k and -400k.
If payrolls decline by 250k or less, it will be very positive for risk which means a strong rally in risk currencies like the AUD, NZD, and CAD vs. lower yielding and non-commodity based currencies. As usual, the USD and Yen would be likely to suffer, especially against the EUR, which tends to move against these, especially the USD.
If payrolls decline by 400k or more, traders could expect a wave of risk aversion that could drive the dollar lower against the Japanese Yen but higher against the riskier currencies.
Anything in between should elicit only a modest reaction in the direction of the surprise. Non-farm payrolls are a notoriously volatile piece of data to trade as revisions and expectations also impact the market’s reaction.
Traders should also remember that the first reaction to the non-farm payrolls report is usually not the real one that lasts for the rest of the trading day. Six out of the last seven times non-farm payrolls were released, the knee jerk reaction was quickly erased, and the longer term trend resumed. Even though the direction associated with these instances has not always been the same, the immediate reaction is usually not sustained, and eventually reversed into a more substantial move that lasted for the course of the trading day. When it comes to trading non-farm payrolls, it pays to wait. Evidence of the erratic trading is seen after the most recent non-farm payrolls report. The EUR/USD fell on the negative surprise but quickly spiked higher before giving back those gains to trade 130 pips lower by the end of the day.
CONCLUSIONS
Pronounced quiet suggests traders remain cautious ahead of Friday's US non-farm payrolls data. Last month's announcement was disappointing and sent world markets tumbling from near 2009 highs. See AVAFX's special report on ideas for profiting from this event at www.avafx.com/analysis.
ECONOMIC CALENDAR
[Forecasted—Prior ] All times are GMT, *= Most Important
THURSDAY AUG 6TH quiet day
2:30am AUD Employment Change +32.2K -18.8K -23.1K
2:30am AUD Unemployment Rate +5.8% 6.0% 5.8%
*Tentative GBP MPC Rate Statement BoE SURPRISES W/ ADDITIONAL QE, POUND PLUNGES
*7:00am GBP Official Bank Rate 0.50% 0.50% 0.50%
*7:45am EUR Minimum Bid Rate 1.00% 1.00% 1.00%
*8:30am CAD Building Permits m/m +1.0% -1.2% +17.5%
*8:30am EUR ECB Press Conference
*8:30am USD 1ST TIME Unemployment Claims 550K 593K 584K
FRIDAY AUG 7TH
2:30am AUD RBA Monetary Policy Statement
9:30am GBP PPI Input m/m -0.8% 1.5%
11:00am EUR German Industrial Production m/m 0.6% 3.7%
12:00pm CAD Employment Change -19.0K -7.4K
12:00pm CAD Unemployment Rate 8.8% 8.6%
1:30pm USD Non-Farm Employment Change -320K -467K
1:30pm USD Unemployment Rate 9.6% 9.5%
1:30pm USD Average Hourly Earnings m/m 0.1% 0.0%
3:00pm CAD Ivey PMI 55.2 58.2
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.
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