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20 Dec 2016
Investors ponder US inflation outlook - AM Briefing
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Markets react to FOMC “dot plot” - PM Bulletin
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Dollar soars on hawkish “Dot Plot” - AM Briefing
15 Dec 2016
FOMC rate decision in focus - Video Update
14 Dec 2016
Countdown to FOMC rate decision - AM Briefing
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US Federal Reserve look-ahead - PM Bulletin
13 Dec 2016
Federal Reserve begins two-day meeting - AM Briefing
13 Dec 2016
Bollinger Bands explained - Trading Guide
12 Dec 2016
Crude gaps higher and lifts equities - AM Briefing
12 Dec 2016
Trump surge morphs into Christmas rally - AM Briefing
09 Dec 2016
ECB tapers bond buying programme - PM Bulletin
08 Dec 2016
All eyes on ECB - AM Briefing
08 Dec 2016
Look-ahead to tomorrow’s ECB meeting - Video Update
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European stock indices surge higher in early trade - AM Briefing
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What is the MACD indicator? - Trading Guide
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Quiet start for European trading - AM Briefing
06 Dec 2016
Technical Indicators - Moving Averages - Trading Guide
05 Dec 2016
Italian PM Renzi resigns after losing referendum vote - AM Briefing
05 Dec 2016
US Non-Farm Payroll update - PM Bulletin
02 Dec 2016
Non-Farm Payrolls in focus - AM Briefing
02 Dec 2016
Non-Farm Payroll look-ahead - PM Bulletin
01 Dec 2016
Crude holds gains after OPEC move - AM Briefing
01 Dec 2016
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 Friday 02 December 2016

Non-Farm Payrolls in focus - AM Briefing

 

 

Early moves

- European equities fall sharply

- More US sector rotation

European equities are sharply lower in early trade this morning. Investors look to be trimming their exposure ahead of the weekend and the Italian referendum. There’s also a concern that Wednesday’s OPEC deal to cut production may not be as effective as promised. In addition, investors responded to yesterday’s sell-off in US tech stocks.

Yesterday there was an additional bout of rotation going on in US markets. This saw the Dow end around 70 points higher while the NASDAQ 100 lost close to 1.6%. Investors continued to hoover up banking and financial stocks, such as Goldman Sachs, while the tech sector was out of favour once again.

The consensus expectation is for US non-farm payrolls to show an increase of 165,000 in November - just a touch above the 161,000 from the previous month. We’d really have to see a disastrous number tomorrow for investors to worry about the US economic outlook and readjust the odds on a rate hike on 14th December. Consequently, we should expect a benign market reaction to, say, 150,000 or above. It’s unlikely investors will be too concerned about the US economic outlook unless payrolls plummet below 100,000 or so. In fact, there are now worries that a strong jobs number could be market-negative if it leads to another surge in bond yields. If the US economy is finally turning a corner just as president-elect Trump talks about tax cuts and infrastructure spending, then the danger is of an overheating economy and runaway inflation.

Sunday brings the Italian referendum on constitutional change. This is a concern for investors as Prime Minister Matteo Renzi has said he will resign if there’s a majority “no” vote. This could be highly destabilising for the Italian economy and it comes just as a number of troubled banks are preparing to tap investors for additional capital. It should be remembered that Italy’s banking system is weighed down by hundreds of billions of non-performing loans. There’s little indication about how the vote could go as opinion polls aren’t allowed in the few weeks ahead of any vote. However, even if the vote goes Mr Renzi’s way, it simply means that he has a heap of problems which still need resolving.

Stock Index Update

- Mixed session for equities

- November’s payroll report in focus

Yesterday brought another mixed session for equity markets. The European majors were generally weaker. The only exception was the Italian MIB which pushed higher as shares in the banking sector bounced strongly. Once again, we saw some divergence across the US indices. The Dow rallied; the S&P spent most of the session little-changed while the tech-heavy NASDAQ fell over 1%.

Today brings the latest update for US Non-Farm Payrolls. Typically this is the most important data release in any month as it is the main measure of US employment. Maximising employment, along with maintaining price stability, make up the Federal Reserve’s dual mandate. However, today’s number may prove to be of less interest to investors than usual. The Fed has already made it fairly clear that they are ready to hike after their next meeting which ends on 14th December. The CME’s FedWatch Tool puts the likelihood of a rate hike at 96%. It would be far more disruptive if the Fed held back from hiking rates now as investors would wonder what the central bank could see which they couldn’t. With the US presidential election out of the way, that political dimension is no longer an obstacle for a rate hike. Also, Donald Trump’s campaign promises of tax cuts and infrastructure spending plans suggest that inflation could pick up and easily overshoot the Fed’s 2% target. The consensus expectation is for a payroll gain of 165,000. But investors are unlikely to recalculate the odds on a rate hike unless we see a number of 100,000 or below.

Commodities Update

- Crude surge extends for second day

- Gold continues to slide

Yesterday Brent and WTI built on gains which came on the back of OPEC’s agreement over production cuts. Brent broke above resistance around the $53/53.50 level which marked the highs hit in June and October this year. Meanwhile, WTI retested its own areas of resistance from the same time around $51.50/52.00. If anything, WTI is probably the more important of the two contracts to watch - at least from a technical perspective. WTI tends to adhere to technical levels more rigidly than the Brent contract. Consequently, it will be interesting to see if the US benchmark manages to break above resistance ahead of the weekend.

Fundamentally, it appears that traders are prepared to take yesterday’s OPEC deal at face value. No doubt many were short ahead of the Vienna meeting and have now been forced to cover. But others will be wondering how much more upside there is in this rally. It’s one thing to agree to production cuts and quite another to adhere to them. In addition, the current rally should help to embolden US shale oil producers who will be anxious to boost output to take advantage of the current price spike.

There seems no end in sight to the sell-off in gold. Yesterday it fell sharply again and hit its lowest level since February this year, although a late bounce saw it close above $1,170. The decline in gold has been precipitous ever since it briefly spiked above $1,330 once it became apparent that Hillary Clinton’s bid for the US presidency had unravelled. Since the early hours of 9th November gold has fallen 13%, smashing below a number of significant support levels. In fact, it’s difficult to pin-point the next significant level of support, even though the metal is looking extremely oversold at current levels. Investors have rushed to dump gold as the dollar continues to rally on the prospect of raised inflation expectations in the US. On top of this, there are fears that Indian Prime Minister Modi may follow up his ban on 500 and 1,000 rupee notes with restrictions on gold imports. This hasn’t happened yet. However, Chinese policymakers have already curbed gold imports in an attempt to clamp down on capital leaving the country.

Forex Update

- Sterling soars

- US dollar drifts ahead of payroll data

The US dollar slipped yesterday despite a sharp uptick in two US Manufacturing PMIs. The reports showed that the sector was expanding at its fastest rate since the first quarter of 2015. This is a welcome pick-up in manufacturing and comes hot on the heels of a better-than-expected upward revision to US third quarter GDP. Taken together, the numbers add weight to the argument that the Federal Reserve should raise rates following its two-day meeting on 13th/14th December. It seems very unlikely that today’s Non-Farm Payroll number will upset that view - unless it comes in below 100,000 or so.

Sterling shot higher yesterday. The pound hit its highest level since early October against the US dollar and a three month high against the euro. The rally came after the UK appeared to be taking a softer line towards Europe as it plans its negotiations to leave the European Union. Brexit Minister David Davis suggested that the UK would consider paying the EU for market access.

On Wednesday the Fed released its latest Beige Book. Seven regional Fed districts reported that economic activity was growing at a modest or moderate pace, down from eleven in the last report. This month’s report was notable for the frequency with which headwinds caused by dollar strength was cited as a reason for economic weakness. This could be a concern going forward, particularly if the dollar continues to push higher if the Fed feels forced to tighten monetary policy further.

Upcoming events

Today’s key economic data releases and events include Spanish Unemployment Change, UK Construction PMI, Euro zone PPI and Canadian Unemployment. From the US we have Non-Farm Payrolls, the Unemployment Rate and Average Hourly Earnings. Later in the day we have speeches from FOMC-voting members Lael Brainard and Daniel Tarullo.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: AM Bulletin

Category: AM Bulletin


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