PIG TODAY-D-Day for NFP

Friday March 10: Five things the markets are talking about

An upbeat payrolls report will add to expectations that the Fed will raise rates next week (Mar 14-15).

Today’s headline print is expected to be high (+197k and +4.7%) given the extremely high ADP employment figures we have seen this week. Any serious deviation to the downside and the U.S bond market will be aggressively unwinding the almost ‘slam dunk’ expectation that fixed income dealers have already priced into the short-end of their treasury curve.

Yesterday, ECB President Draghi sent some confusing signals in his rate announcement press conference. While the main message is that the ECB is inching toward a policy exit, he undermined the forward guidance by reading out a year-old statement stating that the ECB does “not expect a further rate cut,” and also said that the ECB’s forecast on wages, productivity and core inflation “looks ambitious.”

Despite the ‘no rate change’ decision, the somewhat less ‘dovish’ press conference has given the EUR (€1.0611) some stamina for now.

A tighter U.S labor market, stock market boom and rising global inflation supports the Fed increasing interest rates, but how many for this year?

Canada will also be releasing its job numbers at 08:30am. Will the headline print (-4k exp.) again sideswipe the market?

Note: Daylight savings time in North America begins on Mar 12

1. Global stocks get the green light In Japan, the Nikkei closed at a 15-month high on a weaker yen (¥115.41) benefiting exporters. The index added +1.5% Friday, its highest closing level since Dec. 7, 2015. For the week, the benchmark index has climbed +0.7%. The broader Topix was up +1.2%.

In Hong Kong, its main index ends up despite oil prices dropping. The Hang Seng index gained +0.3%, while the Hong Kong China Enterprises Index shed -0.3%, dragged by Chinese energy giants. For the week, the market was roughly flat.

In China, stocks ended flat overnight, as investor excitement towards the country’s annual parliamentary meeting petered out. The Shanghai Composite Index was down -0.1%.

In Europe, equity indices are trading sharply higher after ECB President Draghi’s comments yesterday continue to add support. Financial stocks across Europe are trading notably higher on the Eurostoxx, while energy names are supporting the FTSE 100.

U.S equities are set to open in the black (+0.3%).

Indices: Stoxx50 +0.7% at 3,434, FTSE +0.4% at 7,344, DAX +0.5% at 12,044, CAC-40 +0.5% at 5,008, IBEX-35 +0.7% at 10,069, FTSE MIB +0.8% at 19,727, SMI +0.2% at 8,654, S&P 500 Futures +0.3%

2. Oil edges off three-month low but glut worries persist

Oil prices have recovered a tad overnight after dropping to their lowest in more than three months yesterday, pressured by heavy oversupply despite OPEC’s production cuts.

Brent crude is up +35c at +$52.54 a barrel, after falling -1.7% yesterday and -5% Wednesday in its biggest percentage decline in 12-months. U.S light crude (WTI) is up +40c at +$49.68 a barrel. It fell below -$50 on Thursday for the first time in three-months and is on track for a drop of more than -7% this week.

Market confidence is low after another big rise in U.S crude inventories this week – EIA data mid-week shows crude oil inventories swelled by +8.2m barrels last week to a record +528.4m barrels.

Also providing pressure is U.S oil and gas drilling has also picked up, with producers planning to expand crude production in North Dakota, Oklahoma and other shale regions.

Metals prices are also under pressure, weighed by expectations of a Fed hike next week. Gold for April delivery was recently down -0.4% at +$1,204.20 a troy ounce and remains on track for its longest losing streak in nearly 12-months.

Elsewhere, Copper for May delivery is down -1% at +$2.5750 a pound, trading at a two-month low.

3. Bond rout eases

The nine-day slide in U.S debt prices has eased ahead of this morning’s job’s report. The yield on U.S 10’s has backed up +1bps to +2.61%. Yesterday, it climbed +5bps to exceed the +2.60% watermark that many dealers believe signals the start of a ‘bear’ market, should it hold on a weekly basis.

In Europe, the ECB did not signal cuts in asset buying yesterday, but after its optimistic comments on the economy, money markets is pricing in an ECB rate hike by March 2018. Current futures price suggest there is a +80% chance of a +10bps by the meeting on Jan. 25, 2018 and a +60% chance by Dec. 2017.

Elsewhere, the yield on Aussie 10-year bonds has backed up +5bps to +2.97%. The yield on similar-dated debt in Japan was down -0.5% bps at +0.085%.

4. The dollar waits for NFP

Dollar bulls will be looking to today’s average hourly earnings for support rather than the NFP headline print. Any signs to support inflation expectations will go a long way in pricing in the number of Fed rate hikes in 2017 – currently seen at three hike.

In Europe, with dealers perceiving a “hawkish” tilt from Draghi yesterday has instigated a sell-off in bunds and a higher EUR – currently testing above the psychological €1.0600 handle. German yields, which are set for biggest 14-day rise in nearly two-years has FX traders reconsidering paring current ‘short’ positions. The JPY has managed to drop to a seven-week low outright (¥115.43) on rate differentials. The pound (£1.2158) is little changed despite a plethora of mixed economic data for January (see below).

Elsewhere, EUR/NOK cross is higher (€9.1355) after Norway’s Feb CPI data came in below expectations. The Norges Bank will have a tricky balancing act to pull off at its meeting next week.

5. U.K manufacturing has a weak start to 2017

Data this morning shows that U.K. industrial production declined in January, falling -0.4% m/m. A fall in manufacturing output mostly drove the slowdown, concentrated largely in the volatile pharmaceuticals sector.

Other data also shows the U.K’s trade deficit (-£10.8B vs. -£11.1B) narrowed in January, while construction output declined.

Overall, the data paints a mixed picture of activity for the U.K at the start of the year and any squeeze on consumer spending from quickening inflation is also expected to weigh on growth later in the year.

Source: marketpulse.com