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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Investors on edge after Wall Street sell-off
30 Jun 2017
Central bankers keep traders guessing - Video Update
29 Jun 2017
Markets mixed ahead of weekend - AM Briefing
23 Jun 2017
Investors concerned over oil sell-off - AM Briefing
22 Jun 2017
Crude oil hits seven-month low - Video Update
21 Jun 2017
Sell-off in crude weighs on equities - AM Briefing
21 Jun 2017
Crude falls back to November lows - PM Bulletin
20 Jun 2017
Fresh records for US indices - AM Briefing
20 Jun 2017
Equity rally resumes - AM Briefing
19 Jun 2017
Markets steady ahead of weekend - AM Briefing
16 Jun 2017
FOMC surprises with “hawkish rate hike” - Video Update
15 Jun 2017
Fed unveils “hawkish rate hike” - AM Briefing
15 Jun 2017
FOMC rate decision in focus - Video Update
14 Jun 2017
Investors expect another Fed rate hike - AM Briefing
14 Jun 2017
FOMC look-ahead - PM Bulletin
13 Jun 2017
NASDAQ futures recover in early trade - AM Briefing
13 Jun 2017
Equities slide after US tech sell-off - AM Briefing
12 Jun 2017
May-hem! Tories chuck away majority - AM Briefing
09 Jun 2017
Brief notes on gold - PM Bulletin
08 Jun 2017
Markets calm as investors take “Risky Thursday” in their stride
08 Jun 2017
Markets becalmed ahead of “Risky Thursday” - AM Briefing
07 Jun 2017
Sterling, events on Thursday and the UK election
06 Jun 2017
Safe havens in demand - AM Briefing
06 Jun 2017
Trading Guides - How CFD trading works
05 Jun 2017
Sterling steady after terror attack - AM Briefing
05 Jun 2017
Non-Farm Payrolls in focus - AM briefing
02 Jun 2017
Non-Farm Payroll look-ahead - Video Update
01 Jun 2017
Crude bounces after US inventory data - AM Briefing
01 Jun 2017
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Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Early moves

·         NFPs expected to come in around 186,000

·         Probability of Fed rate hike this month now over 95%

Today’s focus is on the latest US Non-Farm Payroll release for May. This is the last update before Fed’s next rate meeting which takes place over 13-14th June. The consensus forecast is for an increase of 186,000. This would be a touch below the 211,000 in April, but still in line with the 6-month average 184,000 and comfortably above the 150,000 considered to be an acceptable monthly rate of job creation.

Yesterday the ADP Payroll number came out at 253,000 - way above the 181,000 expected. This may not be the most reliable of guides for today’s update but it helps to support the notion that the US is at or near full employment. This supports the consensus view that the US Federal Reserve will hike rates by another 25 basis points in a fortnight’s time. In fact the CME’s FedWatch Tool now puts the probability of a rate rise at over 95%, up from just under 70% a month ago.

But comments this week from members of the Federal Reserve suggest that the US central bank is keeping a close eye on inflation. The latest update on the Fed’s preferred inflation measure, Core PCE, came in at 1.5% annually. Not only is this some way below the Fed’s 2% target, but it has also fallen for three months in a row. Consequently, analysts will also be looking out for today’s update on Average Hourly Earnings. If these slip below the +0.2% expected it would show that wage growth is tepid and isn’t adding to inflation even as the data suggests that there is effectively full employment in the US.

Stock Index Update

·         Strong ADP number points to solid payroll report

·         US indices surge to hit fresh record closes

US stock indices flew higher yesterday helped by the release of a strong ADP Payroll report. This is thought to bode well for today’s official Non-Farm Payroll number with some analysts now forecasting gains of more than 200,000 jobs. The Dow finally managed to take out its old record high from early March. Meanwhile the S&P500 and NASDAQ resumed their climb higher after a brief pause earlier in the week. There have been further gains this morning with European indices also flying higher in a general “risk-on” move.

There have been a number of comments from Federal Reserve members this week. Lael Brainard (a noted dove) said she expects a rate hike soon but also said that “if the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy”.

Meanwhile Federal Reserve Bank of San Francisco President John Williams and Federal Reserve Bank of Dallas President Robert Kaplan both anticipate a further two 25 basis point rate hikes this year. This should help to normalise monetary policy and help set up plans for shrinking the Fed’s balance sheet to prevent the economy from overheating. But there were concerns over the recent decline in inflation. Yesterday Fed governor Jerome Powell said he believed the recent weakness in inflation was transitory. He believes the Fed should look past the inflationary downturn and continue to normalise rates and begin to reduce its balance sheet later this year.

Commodities Update

·         Crude’s rally proves short-lived

·         Gold and silver under pressure

Crude oil rallied sharply in early trade yesterday. This followed the latest US inventory update from the American Petroleum Institute (API) on Wednesday evening. The API data showed an 8.67 million barrel drawdown in crude - well above the 3 million barrel reduction anticipated and representing the biggest drawdown since September 2016. However, both WTI and Brent gave up early gains and were effectively unchanged prior to the release of official US inventory data from the Energy Information Administration (EIA). But both bounced again after the EIA also reported a large drawdown in crude and gasoline stockpiles. However, it wasn’t long before trader sentiment turned negative again. Both contracts sold off sharply and the downside move has continued this morning.

Yesterday OPEC’s Secretary General Mohammed Barkindo said that last week’s deal between OPEC and non-OPEC producers to extend production cuts by nine months was a “work-in-progress.” He suggested that caps could be brought in on other countries. But this did nothing to help lift prices. It was viewed as nothing short of a desperate attempt to shore up a market which is showing its disappointment at last week’s decision. The simple fact is that oil producers had a perfect opportunity to make deeper cuts last week, but quite obviously were unable to reach agreement. There seems very little likelihood that anything will change before the next OPEC meeting in six months’ time.

Thursday morning saw some volatility in silver when it dropped 25 cents in 30 minutes. It managed to recover around half of these losses towards the US open but then lurched lower again. This saw silver briefly break below $17 for the first time in over a week. There was no obvious reason for the move other than some indiscriminate sell orders in the futures market. The trouble with silver, and gold to a lesser extent, is that prices on the futures (paper) market lead those in the physical. The sell-off in silver fed through to gold although the latter seemed quite happy trading above $1,260. There was some chatter that the strong ADP jobs number increased the likelihood of a Fed rate hike in two weeks’ time and that this was weighing on precious metals. However, the probability of a hike has stood around 90% all this week so that doesn’t really stack up. There was relatively little movement on the dollar yesterday. However, Bitcoin surged higher during the session and this could have contributed to the losses in precious metals.

Forex Update

·         Dollar Index hovers near support

·         Yen falls on renewed risk appetite

The US Dollar Index was a touch firmer yesterday but continues to trade in a narrow range. For the last ten days or so the basket has hovered around multi-month lows, although it appears to have found support just north of 96.50. This level marks the 61.8% Fibonacci Retracement of the index’s rally between May 2016 and January 2017. The dollar made decent gains versus the Japanese yen and euro. This came on the back of a strong ADP Payroll number while the data on manufacturing was somewhat contradictory, with two different measures telling two different stories. Nevertheless, Construction Spending was undoubtedly weak, but traders chose to shrug this off. According the CME FedWatch Tool there’s now a 95% chance of a 25 basis point rate hike from the US Federal Reserve in a fortnight’s time. This should help to support the greenback although technically it looks vulnerable. Meanwhile, the Japanese yen lost ground as investors sold (borrowed) the low-yielding currency and invested the proceeds in equities and other risky assets.

Upcoming events

Today’s significant events and economic data releases include Spanish Unemployment Change, Euro zone PPI and UK Construction Spending. From the US we have Non-Farm Payrolls, the Unemployment Change and Average Hourly Earnings.


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Posted by David Morrison

Category: AM Bulletin

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