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With All Eyes On Payrolls US Futures Tread Water; China Rises As Copper Crashes To New 6 Year Low

After going nowhere for the past week, last night Chinese equities opened with a bid tone and traded in the green all day long, resulting in the Shanghai composite ending the week with a gain of 2.2%, on what is gradually becoming a replica of US low volume levitation (to be expected after a third of market participants have now exited the market). The reason for the overnight sentiment: Bloomberg reported that the China Securities Finance Corp, the local plunge protection team, is seeking access to an extra 2 trillion yuan, for a total of CNY5 trillion with which to prop up stocks. In other words, the gradual nationalization of the Chinese stock market first observed here weeks ago, is no longer gradual, which is ironic considering the following two headlines hit just moments ago:


What is appropriate liquidity? Just enough to prevent any selling.. of stocks that is. Because whatever you do don't look at commodities, where copper just dropped to a new 6 year low, as aluminum declined 0.5%, nickel down 0.6%, zinc drops 0.9%, lead loses 0.7%. All very "healthy" indicators of where the Chinese economy is headed.

Elsewhere in Asia, Japanese equities shrugged off a weak opening and morning session to end with modest gains. Earnings optimism associated with a weakening JPY was an oft written about topic. SoftBank rose as it joined the list of companies planning share buybacks. Toshiba was booted from the JPX- Nikkei 400 Index stemming from their accounting fraud. The stock was up .5% The BOJ left monetary policy unchanged, as expected. Gov. Kuroda’s comments were consistent with previous views although he did say that a U.S. rate hike did not pose a risk to Japan. In fact, as long as the BOJ is printing, the thinking goes that nothing poses a risk to Japan.

The big Asia loser was Australia as the four large banks continued to be hit hard on capital ratio concern. ANZ, which raised A$3b in capital finished the week down 7.8%. UBS wrote that more capital will be needed.

Which brings us to today's main event, the July non-farm payrolls - once again the "most important ever" as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' Arima X 12 seasonal adjusters, and whatever goalseeked print the labor department has been strongly urged is the right one.

The bigger issue is whether today good news will be good news (and bad will be bad) in a sign of the upcoming start of rate normalization, or whether a terrible print will send stocks soaring as the case of a September (or December) rate hike is killed once and for all. But the real data point to watch is not the monthly change in payrolls, nor the unemployment rate, but the average hourly wage growth, expected at 0.2%, up from 0.0%, and which in the ECI is any indication, is about to plummet which also would put the Fed on indefinite standby mode.

So ahead of today's nonfarm payrolls report the price action has been relatively subdued with European equities lingering moderately in the red (Euro Stoxx: -0.3%) mostly in sympathy with the weak U.S. close. Disappointing Industrial Production reports from Germany and France also dampened the mood. 

On a sector breakdown European media names including ITV and Mediaset have been weighed upon by Viacom disappointing earnings yesterday, with selling otherwise relatively broad-based. Elsewhere, price action in fixed income markets has been particularly muted with volumes in the bund particularly light, with T-Notes range bound ahead of the non-farm payroll report.

US equity futures are down slightly at this moment, perhaps still digesting yesterday's dramatic rout if not so much in the broader market, then certainly in various "story" and media stocks, as the "day the content died" still reverberates around trading floors.

In FX, the Asia-Pacific session saw AUD the best performing currency underpinned by the latest quarterly SOMP from the RBA . The bank cut GDP forecasts which was widely expected, however revised higher inflation expectations and more importantly continued to signal a neutral policy stance. NZD initially fell after Fonterra cut their milk pay-out forecast by a wider than expected amount, however the currency recovered as Fonterra stated that it will provide support to farmers by an additional NZD 0.50/kg. Elsewhere, the BoJ kept monetary policy steady at a JPY 80trl annual rise in monetary base, as expected.

The European morning initially saw EUR/GBP move higher amid no new fundamental catalysts, subsequently providing EUR pairs with upside and the EUR strength weighing on the USD-index, however with the majority of the move pared heading into the North American open withthe USD-Index flat heading into US hours. In terms of US specific news flow , sentiment for USD index has been dampened by the Atlanta Fed GDP tracker now only showing 1.0% growth for Q3. Note that the Atlanta Fed Q2 forecast was correct therefore adding weight to this quarter's forecast.

After initial strength during the European morning, commodities went on to pare most of their gains to head into the US session relatively flat on the day with WTI and Brent Sep'15 futures remaining below USD 45 and USD 50 handles respectively. Gold is moderately higher on the day but remains on track for its longest weekly losing streak since 1999.

Looking ahead, all eyes will be on today's non-farm payrolls release (Exp. 225k) as participants continue to assess whether the Fed will lift rates next month amid their data dependent stance.


Bulletin Headline Summary From Bloomberg and RanSquawk

  • USD-Index is flat heading into the North American crossover amid light newsflow in the European session as participants await the US non-farm payroll report
  • Commodities head into the US session relatively flat on the day with WTI and Brent Sep'15 futures remaining below USD 45 and USD 50 handles respectively
  • Today's highlight is the US non-farm payrolls release (Exp. 225k) as participants continue to assess whether the Fed will lift rates next month amid their data dependent stance
  • Treasury yields little changed overnight ahead of this morning’s nonfarm payrolls which are expected to come in at +225k; trailing one-year average is +244k, according to Bloomberg data.
  • With energy costs falling and the pound surging, BoE Governor Carney said inflation will stay “muted” and there may even be another period of price declines, reducing the chance of a rate increase this year
  • Wall Street’s biggest bond dealers are amassing the most Treasuries since March last year, even as the Federal Reserve prepares to raise interest rates as soon as next month
  • Hedge funds focused on raw materials lost money on average in the first half, the Newedge Commodity Trading Index shows, and diminishing investor demand spurred Cargill’s Black River Asset Management unit to shut its commodities fund last month
  • Puerto Rico’s default Monday on bonds sold by its Public Finance Corp. underscored the risks of debt backed only by a legislature’s pledge to repay
  • Donald Trump lived up to his billing at center stage of a spirited first Republican presidential debate, taking aim at America’s “stupid leaders” and calling for a wall along the U.S.-Mexico border with a “big, beautiful door”
  • Senator Chuck Schumer, an influential New York Democrat, said he will oppose the Iran nuclear agreement, a setback for President Barack Obama’s effort to ensure the deal survives a review by U.S. lawmakers
  • $2.25b IG deals priced yesterday, $435m high yield. BofAMLCorporate Master Index OAS widens +1 to new YTD wide 159; YTD low 129. High Yield Master II OAS -11 to 540; reached YTD wide 549 on July 27; YTD low 438
  • Sovereign 10Y bond yields mixed. Asian, European stocks mostly lower, U.S. equity-index futures drop. Crude oil and cooper lower; gold rises

US Event Calendar

  • 8:30am: Change in Non-farm Payrolls, July, est. 225k (prior 223k)
    • Change in Private Payrolls, July, est. 212k (prior 223k)
    • Change in Manufact. Payrolls, July, est. 5k (prior 4k)
    • Unemployment Rate, July, est. 5.3% (prior 5.3%)
    • Average Hourly Earnings m/m, July, est. 0.2% (prior 0%)
    • Average Hourly Earnings y/y, July, est. 2.3% (prior 2%)
    • Average Weekly Hours All Employees, July, est. 34.5 (prior 34.5)
    • Underemployment Rate, July, est 10.5% (prior 10.5%)
    • Change in Household Employment, July (prior -56k)
    • Labor Force Participation Rate, July, est 62.6% (prior 62.6%)
  • 3:00pm: Consumer Credit, June, est. $17b (prior $16.086b)

DB's Jim Reid completes the overnight recap

The big day has come, the anticipation soon to be over, money staked and schedules rearranged. Yes it’s the start of the football season in England tomorrow and another season of disappointment for most of us. This is all occurring while the Ashes are perhaps heading home where they belong. I rarely mention cricket in this piece as a lot of readers come from countries that have no knowledge of this great game!! However it’s worth highlighting that in being bowled out for 60 yesterday, Australia batted for the least number of balls (111) in any first innings in the history of test cricket that stretches back 2174 matches over 138 years!! A truly remarkable day.

With thin summer liquidity, there will be a lot of hope that nothing remarkable occurs in today's important payrolls number. DB expects 235k with consensus at 225k. The current trailing three-month moving average is 221k with a year-to-date average of 208k. Whether we think it’s a good idea or not if the Fed are consistent, two numbers above 200k before the next FOMC in mid-September would probably qualify as "some" improvement in the employment picture and provide justification for hiking. If we dip below (like that seen with the ADP report) then there would be enough ambiguity for them to remain on hold. So this is an important number.

Interestingly the Atlanta Fed's GDPNow forecast for Q3 was at 1% yesterday with the model projecting that lower inventory investment is set to subtract 1.7 percentage points from growth so there is evidence that it’s still a fragile environment to tighten policy. The Fed have never raised rates with nominal GDP consistently this low so we will be in unchartered territory with a hike in September. Along with payrolls, we’ll be keeping a keen eye on both the unemployment rate and average hourly earnings readings. DB’s Joe Lavorgna notes that with the former in particular (which he expects to stay at 5.3% today), if the labour market continues to generate 200k+ jobs per month then the unemployment rate will break 5% by year end. This in turn is probably the primary reason that Fed policymakers want to act this year, but the argument against this is clearly the lack of any abnormal wage pressure. Average hourly earnings are expected to tick up to 2.3% yoy (based on the current market consensus), but still leaving it in the range (albeit nearer the top) of the last three years. Joe expects labour costs to eventually accelerate in response to a tightening in the labour market but this will likely only come after we gain a better understanding of where NAIRU is. So a big day of data ahead.

In terms of markets yesterday, a weak set of earnings reports out of media stocks in particular saw the S&P 500 (-0.78%) decline for the fourth time in the last five sessions while the Dow (-0.69%) followed suit and the NASDAQ (-1.62%) suffered its worst day in nearly a month having been led lower by biotech stocks. It was earnings reports from Viacom and Twenty-First Century Fox which weighed on sentiment and has resulted in the S&P 500 media index suffering its biggest two-day fall since November 2008. The latest reports have taken our tally of S&P 500 reporters now to 440 with earnings beats unchanged at 74% but sales beats ticking down again to 49% now (from 50% on Thursday). Energy stocks (+1.59%) actually outperformed yesterday despite another soft day for Oil markets with WTI (-1.09%) and Brent (-0.14%) both slumping further. Gold (+0.42%) and Copper (+0.14%) did have a slightly better session however.
Those moves in Oil probably helped support a stronger day for the Treasury market where we saw yields creep lower ahead of today’s data. The benchmark 10y closed 4.9bps lower at 2.222% and in the process completely wiped out Wednesday’s move higher. The USD had a slightly softer day meanwhile with the Dollar index finishing -0.13%. There wasn’t much in the way of surprises in the latest initial jobless claims data where we saw a 270k print (vs. 272k expected) which was enough to lower the four-week moving average to 268k, the second lowest since 2000. Challenger job cuts for July were eye-catching with a 125% yoy rise for the month to near a four-year high, although this was pinned largely on the announcement of job cuts by the US Army which were said to have accounted for more than half of the number.

Leading into today’s main event, it’s been a positive session for Chinese equity markets with the Shanghai Comp (+1.90%), Shenzhen (+2.29%) and CSI 300 (+1.83%) all up as we go to print. Those moves have helped support the Hang Seng (+0.94%) while the Nikkei (+0.12%) has reversed earlier losses. Elsewhere the Kospi (-0.17%) and ASX (-1.94%) are down. Treasury yields (+1.1bps) have moved a touch higher while the Dollar is more or less unchanged. The Aussie Dollar (+0.36%) meanwhile has received a slight boost after the RBA lifted its inflation forecast for the near term and sounded out a better outlook for employment. Elsewhere, the Yen is little moved after the BoJ left QE purchases unchanged as expected with the Central Bank reiterating that Japan’s economy has continued to recover moderately and that CPI will likely stay at 0% for the time being.

Over in Europe yesterday it was all eyes on the BoE and ‘Super Thursday’. The Bank left rates unchanged at 0.5%, as expected, but what did take the market by surprise were the minutes which signalled that just one of the MPC members (McCafferty) voted for a hike after suggestions that we might see more support for a rate rise. The minutes struck a slightly more dovish tone on the whole than many had been expected too, noting that ‘in light of the reduction in oil prices and appreciation of sterling over the past three months, it appeared that the increase in inflation over the following year would be more gradual than had previously been supposed’. McCafferty meanwhile did see that risks to the medium-term inflation outlook were on balance sufficient to the upside to justify a hike, however near term inflation forecasts were given a dent as the 2015 forecast was taken down to 0.3% from 0.6% although 2-year ahead inflation forecasts were given a slight boost. There was much focus on the role of Sterling. The minutes noted that ‘to the extent that the appreciation of Sterling could be expected to weigh on inflation for a persistent period, the corresponding pickup in domestic costs necessary to return inflation to the target within three years would be greater’. Governor Carney also touched upon this in his statement and although acknowledging the recent strength in the currency, said that even so ‘we see robust private sector growth here and consistent with that is a need to begin to increase interest rates’. Carney went on to say the exact timing will be data dependent but will come into ‘sharper relief’ around the turn of the year. DB’s George Buckley expects inflation to rise from the end of this year and head towards target by the end of next, with a May 2016 hike his preferred timing.

All told we saw Gilt yields move lower across the curve, with 10y yields down 5.2bps to 1.922%. Sterling also took a decent hit, closing 0.58% lower against the Dollar at $1.551 and tumbling 0.75% against the Euro. Elsewhere in Europe, there was a reasonable rebound in yields with 10y Bund closing 4.5bps lower at 0.707% and yields in the periphery seeing similar moves lower. It was weaker session across risk assets however as commodity names came under pressure. The Stoxx 600 closed down 0.80% while the DAX and CAC closed -0.44% and -0.09% respectively. In credit Crossover leaked 10bps wider meanwhile. That came despite a fairly robust German factory orders reading for June with the +2.0% mom (vs. +0.3% expected) print well ahead of consensus and helping to push the annualized rate up to +7.2% yoy. The detail suggested some weakness in core orders however, admittedly after two strong months. Finally, in case we didn’t get enough out of the UK yesterday we also saw industrial and manufacturing readings for June which were slightly mixed on the whole. The latter saw the headline reading come in well below expectations (-0.4% mom vs. +0.1% expected), pushing the annualized rate down to +1.5% yoy (from +2.2%) however the manufacturing reading came in a touch ahead of consensus (+0.2% mom vs. +0.1% expected) for the month.

Looking at today’s calendar now. It’s a fairly busy start to the day in the European timezone this morning where we’ll get German industrial production and trade data, French industrial and manufacturing production data along with trade data too and finally the UK trade balance. This is of course before the main event in the US this afternoon with the aforementioned July payrolls report and associated unemployment, average hourly earnings and labour force participation rate readings. Consumer credit for June will also be due later tonight. Over the weekend meanwhile we’ve got an important release of data out of China with trade data on Saturday and CPI/PPI on Sunday. Earnings season is wrapping up but Berkshire Hathaway is the notable reporter today.