After yesterday's two key events, the ECB and OPEC meetings, ended up being major duds, the market is looking at the week's final and perhaps most important event of the week: the May payrolls report to generate some upward volatility and help stocks finally break out of the range they have been caught in for over a year. However, even today's jobs number will likely be skewed as reported previously as a result of the Verizon strike which is said to trim some 35,000 jobs from the headline print, casting anything the BLS reports today in doubt. On the other hand, the Verizon strike is precisely why the consensus expectations going into today is 160,000 not 200,000; however if even that number is missed, economists will promptly forget that they had already factored the Verizon strike in their calculations.
That said, if futures are expecting a miss, they don't show it and most asset classes, from stocks to commodities, are heading toward the monthly U.S. payrolls report with a relative sense of optimism hoping it will bring some clarity to a Fed rate hike, when in reality the message from the recent trend is all too clear.
The sentiment heading into today's jobs print was best summarized by Mitsuo Shimizu, an equity strategist at Japan Asia Securities Group in Tokyo, who said that “the level of attention on tonight’s employment data is very high. The market may rise a bit but it could be a tug of war after that as investors scrutinize what impact the data may have on the possibility of higher interest rates.”
So as we await the latest seasonally adjusted, politically motivated random number from the BLS, a quick look at markets shows that shares rose in Europe and Asia after the S&P 500 Index closed at a seven-month high on Thursday. The Stoxx Europe 600 Index added 0.5 percent at 10:15 a.m. in London, trimming its first weekly decline in four to 1 percent. Futures on the S&P 500 were little changed. The MSCI Emerging Markets Index of shares rose for a second, advancing 0.4 percent to a one-month high. The Shanghai Composite Index climbed 0.5 percent, taking its weekly gain to 4 percent, the first increase in the period for almost two months on speculation MSCI Inc. will include yuan-denominated shares in its global indexes.
Commodities neared a bull market as Brent crude exceeded $50 a barrel, copper advanced and soybeans led crops higher. The Aussie, New Zealand’s dollar and Indonesia’s rupiah led gains among 31 major currencies. The Bloomberg Commodity Index rose 0.3% to 86.99, a seven-month high. The gauge bottomed this year at a closing low of 72.88 in January, and a finish above 87.45 points would mark a 20% advance, meeting the common definition of entry into a bull market.
Some, however, remain skeptical: “Commodities have had a lot of false breakouts before, so although a bounce-back certainly helps stocks, I’d take it with a pinch of salt,” said Chirin Gill, a London-based fund manager at Daiwa SB Investments. “The market is otherwise being completely driven by macro news right now. Traders are looking out for any trends in economic data for clues on how monetary policy will play out.”
As Bloomberg writes, "financial markets have become emboldened that the economy is strong enough to withstand a hike this month or next." It is worth nothing that it was writing virtually the same thing in December. Fed Governor Lael Brainard will be the first U.S. central bank official to discuss policy after the report Friday, which is forecast to show employers added 160,000 jobs in May, the same as in April. Fed Governor Daniel Tarullo said Britain’s vote on European Union membership June 23 was a “factor I would consider” at the central bank’s meeting this month.
Aside from just the job number, market watchers will be hoping it reveals some more about the Fed's "imminent rate hike plans: “The environment is not bad for risk assets and I expect it to continue, but all the attention is now on the Fed rate hike, including what impact a stronger dollar could have on emerging-market economies," said Yusuke Kuwayama, a portfolio manager at Tokio Marine & Nichido Fire Insurance Co. in Tokyo. “If the payrolls tonight are strong, we’ll see markets further price in a rate hike by pushing short-term yields higher and giving the dollar a bit of a boost.”
Market Wrap
- S&P 500 futures unchanged at 2104
- Stoxx 600 up 0.5% to 346
- FTSE 100 up 0.8% to 6237
- DAX up 0.6% to 10265
- S&P GSCI Index up 0.2% to 375.3
- MSCI Asia Pacific up 0.3% to 128
- Nikkei 225 up 0.5% to 16642
- Hang Seng up 0.4% to 20947
- Shanghai Composite up 0.5% to 2939
- S&P/ASX 200 up 0.8% to 5319
- US 10-yr yield up less than 1bp to 1.8%
- German 10Yr yield down less than 1bp to 0.11%
- Italian 10Yr yield down 1bp to 1.36%
- Spanish 10Yr yield down less than 1bp to 1.48%
- Dollar Index up 0.02% to 95.59
- WTI Crude futures up less than 0.1% to $49.18
- Brent Futures up 0.1% to $50.11
- Gold spot up less than 0.1% to $1,211
- Silver spot up 0.5% to $16.08
Top Global News
- Delta, United Continental Said to Be Studying Bids for Avianca, as Latin American airline exploring strategic options including a full or partial sale, according to people familiar with the matter
- Bayer Said to Secure $63 Billion in Financing for Monsanto Bid: Bank of America, Credit Suisse, Goldman, HSBC, JPM are lenders; bridge loan may be increased should Bayer bump offer
- Colony Capital Said to Near Deal For NorthStar Asset Management: Colony Capital and NorthStar Realty Finance close to agreeing to a takeover of commercial real estate manager NorthStar Asset Management, according to people familiar
- U.S. Yield at 16-Year High Versus U.K. Before Jobs, Brexit Vote: U.S. two-year notes yielded 51 basis points more than same-maturity government debt in the U.K., the biggest difference in 16 years; U.S. payrolls report today, economy added 160,000 jobs in May, same as April, survey shows
- Bain, PAG Asia Said to Join KKR in Studying Bids for Takata: Bain and PAG Asia are evaluating bids for Takata, joining KKR among private equity firms with an interest; Lazard advising Takata steering committee to seek investors
- Falcone’s HC2 Willing to Raise Its $1.04 Billion Andersons Offer: In a letter to Andersons Chairman, Falcone reiterated its earlier $37-a-share offer and “its willingness to increase its bid, if appropriate, after formal engagement,” HC2 said
- Twitter Said to Have Met With Yahoo on Possible Merger: NYP: Twitter met with Yahoo’s mgmt several weeks ago to discuss possible merger; bowed out of bidding process soon after: NYP
- Redstone Doctor Says Mogul ‘No Longer Trusts’ Viacom CEO: Sumner Redstone had the legal mental capacity to remove CEO Philippe Dauman from the trust that will oversee the co., according to a psychiatrist who examined him last month
- Noble Group Plans China-Backed Issue as Elman to Step Down: Rights shares to be issued at 63% discount to latest close
- BP to Pay $175 Million to Settle Claims It Hid Spill Size: Investor settlement averts trial set for next month in Texas
- Pfizer CEO Read Is Open to Mega-Merger; Inversion? Not So Much: Govt. opposition makes tax move near impossible, CEO says
- Wal-Mart to Start Testing Grocery Delivery Through Uber, Lyft: Retailer will start trying out Uber in Denver and Lyft in Phoenix within the next two weeks
- Seven & i Buys CST Stores in U.S. Push, Not Keen on Takeover Bid: Japanese owner of 7-Eleven will buy 79 gas stations and convenience stores in California and Wyoming from CST Brands Inc., but won’t bid for the entire company
- Saudi Arabia Says Oil at $50 Won’t Hinder Market Recovery: Saudi oil minister speaks in briefing after OPEC meeting
Looking at regional markets, Asia equity markets traded mostly higher following a positive US close where markets recovered from ECB and OPEC events, alongside a rebound in energy post-DoE drawdown. Nikkei 225 (+0.5%) was led higher by index giant Fast Retailing following strong Uniqlo sales, although the index pulled off its best levels as a resilient JPY capped gains. Elsewhere, ASX 200 (+0.7%) outperformed on broad-based gains across sectors, while Chinese markets rose with Shanghai Comp (+0.4%) and the Hang Seng (+0.3%) continued to benefit from Shenzhen stock connect hopes. Finally, 10yr JGBs traded with mild gains despite the positive risk sentiment, as the BoJ entered the market to purchase over JPY 1.2trl in government debt.
Top Asian News
- SoftBank Cutting Its $109 Billion Debt Leaves Funds Wary of Son: Sale of $8.9 billion stake in Alibaba to boost cash, pay debt
- China Search Engine Giant Baidu Said to Raise Loan to $2 Billion: Gets commitments from 21 banks for facility, people say
- Goldman Sees Rising Risk of China’s Yuan Repeating January Rout: Trading wagers on one-off devaluation may intensify again
- China Said to Seek New Global Economic Summits for Bigger Voice: Communist Party leaders want greater say in global economics
In Europe traders have been somewhat in a state of limbo this morning, recovering from the ECB and OPEC non-drama yesterday, while also looking ahead to the risk event of the day in the form of the nonfarm payroll reports. European equities have followed their US and Asian counterparts and trade modestly higher on the day (Euro Stoxx: +0.3%). Energy names are among the best performers this morning, benefiting from upside in the commodity complex, with WTI trading back above USD 49.00 despite the lack of action by OPEC yesterday. Bunds trade near contract highs this morning, continuing the trend seen in the wake of the slightly underwhelming ECB press conference and projections, with further downbeat news this morning coming from the Bundesbank in the form of downgrades to both growth and inflation forecasts. Participants also saw mixed services and composite PMIs, with both final readings from France as well as the German Composite missing on expectations, although the Eurozone wide figure did see a modest beat.
Top European News
- Euro-Area Economy’s Lacklustre Growth to Persist, Markit Says: Gauge of new business growth at manufacturing and services firms fell to a 16-month low in May, meaning output is likely to stay subdued in the coming months
- Brexit Worries Curb U.K. as Markit Sees Economy Barely Growing: Latest data indicate the U.K. economy may expand just 0.2% this quarter, Markit said. That compares with 0.4% growth in 1st 3 months of 2016 and marks the weakest level since 2012
- Brexit Puts 400,000 Services Jobs at Risk in U.K., Osborne Warns: Service companies, Britain’s biggest employers with a workforce of 25m, could be forced to cut 400,000 jobs over the next two years, Osborne will say in a speech on Friday
- As Brexit Flusters Pound Traders, U.K. Equities Remain Calm
- Brexit Alarm Has Bank Watchdog in Sweden Demanding Action Plans
- Shire Completes Merger With Baxalta, Eyes >$20b Revenue Target: Says it will issue additional details on combined company when it reports 2Q results on Aug. 2
- ICAP Lands Deal for Mainland China’s Yuan-Trading Platform: Contract for yuan trading technnology is worth $65 million
- Deutsche Bank Online Banking Shows June 1 Bookings Duplicated: Comments on “display problems” in online banking service
- Emirates Sees Euro in Freefall, Flights Flatlining After Brexit
- Santander, BPI Consider Buying Novo Banco: Diario Economico
- China’s Jin Jiang Wants to Boost Accor Stake to 29%: Figaro: Jin Jiang now controls 15%, Le Figaro reports
In FX, there is little to read into this morning's FX trade, apart from the heavy tone in the EUR, with the market going into meeting yesterday looking for a more upbeat outlook than was alluded to by governing council head. The inflation and growth forecasts were disappointing in this respect, and this has only been exacerbated by the Bundesbank announcement this morning of downward revisions in Germany's equivalent stats. EUR/USD has really struggled to break 1.1160 this morning, though lack of activity may also be attributed to this as we await the non-farm payrolls release later on. USD/JPY has been edging higher though, as have the AUD and NZD, so risk sentiment can be deemed stable on this basis, with the CAD also steady but trading in a very tight range after yesterday's OPEC meeting. All hangs on the US data later today, but there may be some confusion over the impact of the Verizon strikes. Euro zone retail sales lower than expected, but EU composite PMIs higher in the final read, but weakness seen in the French numbers. UK services PMIs were better than expected, but EU polls continue to dominate. The Bloomberg Dollar Spot Index was down 0.1 percent for the week. Two ICM polls, carried out both online and by telephone, put “Leave” ahead this week, while an an Ipsos Mori poll on voter attitudes found 58 percent of respondents said they don’t think leaving the EU would affect their own standard of living. The Number Cruncher Politics website is calculating a Brexit probability of 21.7 percent. The rand slipped 0.1 percent, after appreciating 1.5 percent in the previous three days. South Africa faces the prospect of having its credit rating cut to junk when S&P Global Ratings announces the outcome of a review on Friday.
In commodities, the Bloomberg Commodity Index rose 0.3 percent to 86.99, a seven-month high. The gauge bottomed this year at a closing low of 72.88 in January, and a finish above 87.45 points would mark a 20% advance, meeting the common definition of entry into a bull market. Brent crude added 0.1 percent to trade at $50.10 a barrel. The third drop in U.S. crude inventories in four weeks tempered the impact of OPEC’s decision to stick to a policy of unfettered production, turning down a proposal to adopt a new ceiling on output. Zinc rose for a seventh day for its longest rising streak in almost two years amid continued speculation of a raw materials shortage, rising with copper and aluminum. Net-long positions in LME futures for the metal are close to an 11-month high seen in May, indicating that investors continue to bet on a rally. Soybean futures climbed 1.2 percent to the highest since July 2014, taking this week’s advance to more than 6 percent. Prices surged Thursday amid forecasts for dryer weather in the U.S. growing area.
On today's calendar in the US, the big release is the payrolls print and other components of the May employment report. Away from that there’s other important data due out too. In particular the ISM services reading will be under the spotlight, with current expectations of a 0.4pt drop to 55.3. The final May PMI’s will also be released as well as April factory orders, the April trade balance (which is expected to show a modest widening in the deficit) and finally the last revisions to the April durable and capital goods orders. Away from the data expect there to be the usual focus on the Fedspeak with Evans due to speak this morning in London along while Brainard who is expected to speak in the early evening. Both are scheduled to speak on the economy and policy.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Equities modestly higher this morning amid notable outperformance in energy names with WTI crude holding above USD 49
- FX pairs largely range bound as participants remain sitting on the side-lines ahead of the US NFP report
- Looking ahead as well as the US Nonfarm Payrolls, highlights include US Durable Goods Orders, Factory Orders, Composite and Services PMI and comments from Fed's Brainard
- Treasuries little changed in overnight trading while global equities and commodities rally; today brings nonfarm payroll report with consensus for a gain of 160k and the unemployment rate to drop to 4.9% from 5.0%.
- The May payroll reading will be difficult to decipher after the U.S. jobs recovery suffered a bit of a slowdown in April. A strike involving workers at Verizon probably depressed payrolls last month
- Fears of a potential Brexit may spur Fed to hold off on a June rate rise, playing a bigger role in the central bank’s decision than any positive surprise from U.S. payrolls later today, Bloomberg strategist David Finnerty writes
- The potential effect of the U.K.’s referendum on EU membership “is a substantial unknown,” Federal Reserve’s Evans told reporters in London, added Fed might be in a better place to judge outlook after June meeting, once events like the referendum are out of the way
- The extra yield Treasuries pay over U.K. gilts is surging before a U.S. payrolls report, while investors seek safety in British government bonds as the nation prepares to vote on leaving the European Union
- China’s latest effort to rid its banks of bad loans looks sensible. By packaging the debt into securities, lenders hope to unload them onto risk-hungry investors. But if the first deals in this 50 billion yuan ($7.6 billion) program are any guide, the whole exercise may end up just shuffling bad debt between banks
- The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Lew calling it an “area of central concern.” The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said
- The euro area’s lackluster pace of growth is set to continue as the economy cools from a strong first-quarter performance, according to Markit Economics. Its gauge of new business growth at manufacturing and services firms fell to a 16-month low in May
- Commodities are nearing bull-market territory after rebounding from the lowest level in at least 25 years as oil prices rallied, complementing advances in recent weeks in soybeans and zinc
US Event Calendar
- 8:30am: Trade Balance, April, est. -$41b (prior - $40.4b)
- 8:30am: Change in Non-farm Payrolls, May, est. 160k (prior 160k)
- Change in Private Payrolls, May, est. 150k (prior 171k)
- Change in Mfg Payrolls, May, est. -2k (prior 4k)
- Unemployment Rate, May, est. 4.9% (prior 5%)
- Average Hourly Earnings m/m, May, est. 0.2% (prior 0.3%)
- Average Hourly Earnings y/y, May, est. 2.5% (prior 2.5%)
- Average Weekly Hours All Employees, May, est. 34.5 (prior 34.5)
- Change in Household Employment, May (prior -316k)
- Labor Force Participation Rate, May (prior 62.8%)
- Underemployment Rate, May (prior 9.7%)
- 9:45am Markit US Services PMI, May F, est. 51.4 (prior 51.2)
- Markit US Composite PMI, May F (prior 50.8)
- 10:00am: ISM Non-Mfg Composite, May, est. 55.3 (prior 55.7)
- 10:00am: Factory Orders, April, est. 1.9% (prior 1.1%, revised 1.5%)
- Factory Orders Ex Trans, April (prior 0.8%, revised 1%)
- Durable Goods Orders, April F (prior 3.4%)
- Durables Ex Transportation, April F (prior 0.4%)
- Cap Goods Orders Non-def Ex-Air, April F (prior -0.8%)
- Cap Goods Ship Non-def Ex-Air, April F (prior 0.3%)
- 1pm: Baker Hughes rig count
Central Banks
- 12:30pm: Fed’s Brainard speaks in Washington
DB's Jim Reid concludes the overnight wrap
So here we go again. Another payroll Friday has been reached. By my crude calculations this morning I think today's might be the 250th of my career. Interestingly they've only averaged 95k over this whole period but this number is heavily skewed by the recessions. I wonder what the probabilities of me writing this by the time my 500th comes along. By then a robot will likely be the author which is ironic to discuss on employment day.
In preparation for this main event, yesterday saw ADP report a 173k private payroll gain in May - exactly in line with expectations. There was no evidence that the Verizon strike impacted the number. However the BLS strike report suggests that payrolls are likely to show a 35k impact from the striking Verizon workers which is why consensus is at 160k not 200k - the 3 month trailing average. DB is at 135k on concerns weaker growth and profits will dampen employment. As always it’s worth also keeping an eye on the other important components of the report. The market is expecting a +0.2% mom rise in average hourly earnings, no change in average weekly hours of 34.5hrs and a slight decline in the unemployment rate to 4.9%.
This follows on from what must have been a busy day in Vienna where both the ECB and OPEC met. Both meetings ended with not much new to report with the ECB being as expected but with the OPEC result a disappointment for some reflected in the 2% drop in WTI to just below $48/bbl after news came through that no production ceiling would be agreed upon but with much of the chatter from the various major oil producing nations actually fairly upbeat. However we rallied back into the close and in fact actually finished +0.33% higher on the day at $49.17/bbl following the latest US crude inventory data which showed stockpiles dropped by 1.4m barrels last week. Brent actually settled at just above $50/bbl at the end of play and both are hovering at similar levels this morning.
It was those moves in Oil yesterday which dictated much of the market direction for risk on both sides of the pond. European equities ended up little changed with the Stoxx 600 closing +0.07% while in the US the performance in the S&P 500 appeared to be a mirror image of Wednesday. Indeed the index hit its lows for the day (-0.50%) about an hour in, before then climbing back over the remainder of the session to finish +0.28%. That puts the index now at a seven-month high. Rates-wise US 10y Treasury yields dipped a few basis lower to close below 1.80% (at 1.799%) for the first time since mid-way through last month. There were similar moves in Europe where 10y Bund yields were down 2bps and at 0.113% - the lowest since April 11th.
Switching over to the latest in Asia where markets are closing the week on a more mixed note. The Nikkei (+0.17%) has bounced back modestly following two days of steep declines, while the Hang Seng (+0.25%) and ASX (+0.68%) are also ending the week on a more positive note. The Shanghai Comp (-0.02%) and Kospi (-0.10%) are both a bit lower however, while the latest China data showed some deterioration in the services sector. The Caixin services PMI edged down 0.6pts last month to 51.2, the second consecutive monthly decline with the composite reading of 50.5 down from 50.8.
Moving on. In terms of the ECB yesterday, as highlighted earlier there wasn’t a huge deal of new news to come out of the meeting. The overall tone of meeting was one of confidence and patience about the new policies being implemented before any real conclusions are drawn. DB’s Mark Wall summed up Draghi’s press conference as waiting on three things before reassessing policy stance. First, the UK referendum result. Draghi’s comments suggested that the euro area could suffer from a UK decision to leave the EU. Second, an assessment of the benefits of soon to be implemented policies, namely the CSPP and TRLTRO2 with the former beginning on 8th June and the latter auction allotted for 23rd June. Third, the exchange rate. The ECB Council continues to expect the exchange rate to weaken thanks to divergent monetary policy cycles. Mark notes that should Brexit be avoided, then he would expect the ECB to remain on hold until at least September which is the soonest the ECB could make a preliminary judgement about the benefits of CSPP and TLTRO2. In this scenario he expects the ECB to err on the side of caution and extend QE further in September. If Brexit occurs, he expects further policy easing from the ECB and for this to occur relatively quickly.
That brings us to the CSPP then and some of the finer technical details released by the ECB yesterday after the programme was confirmed as starting on the 8th June. It was confirmed that in addition to banks and their subsidiaries, investment firms as per MiFID II are ineligible. We understand this to mean then that insurers and REITS are eligible as previously expected, but the newly added condition eliminates brokers, securities firms and asset managers. Meanwhile, the Eurosystem can hold onto fallen angel bonds, i.e. those that later lose the IG status necessary for eligibility for purchases. It was confirmed that the ‘market capitalisation’ definition means the amount outstanding for the internal benchmark. The bonds purchased by the Eurosystem will be available for borrowing and their list will be published weekly. The definition of a ‘public undertaking’, for which primary market purchases are not allowed and lower issue share limits apply, has been clarified and finally some PSPP-eligible corporates have been moved to CSPP. More details on this are in the report published by Michal Jezek in my team which should have hit your emails a short time ago.
Staying on the central bank theme, there was also a little bit of Fedspeak for markets to digest yesterday. The Fed’s Kaplan (moderately hawkish usually) said that he is expecting ‘solid job growth’ in today’s employment report and that he would advocate for tightening in the ‘near future’ without offering more specific timing. On the subject of the Brexit vote, he said that the Fed needs to ‘be prepared’ although a more cautious view on that was given by the Fed’s Tarullo yesterday. One of the more dovish voters on the committee, Tarullo said that the Brexit vote is bringing alot of uncertainty and is a factor that he would consider in his policy outlook. He went on to say that ‘in the short term it is more a question on the immediate impact on markets’. Tarullo also spoke on the subject on banking regulation and said that he expects stress tests for the bigger US banks to get stricter in the near term.
With regards to the other data yesterday, initial jobless claims in the US last week were down a modest 1k to 267k (vs. 270k expected). That’s had the effect of lowering the four week average to 277k. The other data yesterday came in the form of the NY ISM survey which turned a few heads with its near 20pt decline in the index to 37.2pts in May. That’s actually the lowest level since 2009 although the index is notoriously volatile from month to month so we take the data with a bit of a pinch of salt for now.
Looking at the day ahead, this morning in Europe it’s all about the remainder of the PMI’s where we’ll get the final services and composite readings for the Euro area (the initial composite flash reading was 52.9) as well as the data out of the periphery. Euro area retail sales for April are also due to be released this morning. Over in the US the big release is the aforementioned payrolls print and other components of the May employment report. Away from that there’s other important data due out too. In particular the ISM services reading will be under the spotlight, with current expectations of a 0.4pt drop to 55.3. The final May PMI’s will also be released as well as April factory orders, the April trade balance (which is expected to show a modest widening in the deficit) and finally the last revisions to the April durable and capital goods orders. Away from the data expect there to be the usual focus on the Fedspeak with Evans (8.45am BST) due to speak this morning in London along while Brainard (5.30pm) who is expected to speak in the early evening. Both are scheduled to speak on the economy and policy.