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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
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31 Mar 2016
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30 Mar 2016
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30 Mar 2016
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18 Mar 2016
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18 Mar 2016
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16 Mar 2016
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16 Mar 2016
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15 Mar 2016
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11 Mar 2016
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09 Mar 2016
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08 Mar 2016
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08 Mar 2016
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07 Mar 2016
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07 Mar 2016
March: Non Farm Payrolls Out Today
04 Mar 2016
AM Bulletin: Markets quiet ahead of Non-Farms
04 Mar 2016
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04 Mar 2016
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03 Mar 2016
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03 Mar 2016
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02 Mar 2016
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 Thursday 31 March 2016

PM Bulletin: Non-Farm Payroll look-ahead

 

 

Tomorrow sees the release of US Non-Farm Payrolls for March. This is always a major monthly event which usually leads to sharp market movements, particularly if the headline number comes in significantly higher or lower than the consensus market expectation. But given Janet Yellen’s speech earlier this week, I wonder just how important this month’s payroll numbers will prove to be. After all, Mrs Yellen has told us everything we need to know about the outlook for monetary policy for the next six months. Effectively she slapped down all those regional Federal Reserve presidents who last week were calling for an April rate hike. Even June now looks like a long shot. Instead the odds have shortened on September and December as being possible windows for monetary tightening.

This seems ridiculous given the numbers for US unemployment and inflation. After all, at 4.9% the US Unemployment Rate is at its lowest level for eight years. Meanwhile, inflation is picking up rapidly with February’s core rate coming in at 2.3% on an annualised basis. But it now seems we can take the Federal Reserve’s dual mandate of ensuring maximum employment and maintaining price stability (targeting an inflation rate of 2%) and file it under “Historical Oddities.”  After banging on about how the Fed’s rate decisions are “data dependent” (US data that is) Mrs Yellen has now told us that she’s just as concerned about global growth, China and the price of oil. Consequently, there’s really little point on working on the assumption that the FOMC has specific unemployment and inflation targets. The Fed will continue to keep rates low because it can’t let the dollar appreciate. It needs to keep a lid on the dollar to lift crude prices (so helping its domestic oil explorers and producers and take the pressure off their lenders), boost US multinationals (who lose overseas sales and revenue with a strong dollar), help emerging market economies with large dollar-denominated debts and keep China from devaluing the yuan. Otherwise the world’s in real trouble.

Nevertheless, the Non-Farm release is usually a good opportunity for short-term traders and algos to get busy. The consensus expectation is for an increase of 206,000. This would be down on February’s reading of 242,000 but that in turn was well above the 195,000 expected. A weak number (say 180,000 or below) would reinforce the view that US rates aren’t going up anytime soon. This should hurt the dollar and boost commodities. I don’t know how equities will react – they may bounce on “bad news is good”, or sell off on fears that not everything is rosy in the US. After all, seven years on from the nadir of the Financial Crisis and Mrs Yellen is still talking about further quantitative easing. But whatever the short-term reaction, it could easily reverse later in the day. A strong number (220,000 and above) should lift the dollar, be bad for gold and may well help equities. But the market’s reactions will probably be knee-jerk spasms just out of habit. What will be worth looking out for however is any pick-up in Average Hourly Earnings. A pick-up here (+0.2% or above month-on-month) should feed through to consumption and inflation. This would be particularly positive for risk assets– especially if the Fed has no intention of tightening monetary policy in response.


Rubbish

This will also be the last Non-Farm Payroll update before the US Federal Reserve meets on 15th/16th March. This will be the first quarterly meeting since December which was when the Fed finally bit the bullet and raised rates for the first time since June 2006. The FOMC will also release its latest Summary of Economic Projections and Fed chairman Janet Yellen will hold a press conference. In other words, if the Fed really felt that rates should go up again ahead of the summer, this would be the time to announce it.

Now the Fed has made it abundantly clear that its rate decisions are data-dependent. At the same time, it has to walk a tricky path in persuading investors that the US economy is heading in the right direction while not so strong that it will raise rates by as much as 1% in 2016. US economic data since the beginning of the year has been patchy to poor. Manufacturing and Services PMIs, Durable Goods and the most recent Consumer Confidence numbers have all disappointed. On the flip side housing, employment and Average Earnings are relatively bright spots while the jury is still out on Factory Orders, Retail Sales and Industrial Production.

Yesterday’s ADP payrolls rose 214,000 against an expected increase of 185,000. Last month’s number was revised down to 193,000 from 205,000, but overall this was a decent number and bodes well for tomorrow’s Payroll release.

The consensus expectation is for a rise of 195,000 jobs in February. This would represent a solid increase on last month’s reading of 151,000 which was well below the 189,000 consensus expectation. On top of that, December’s number was revised down sharply. The trouble is that it’s quite difficult to predict how investors will react to data that comes in better, or worse, than expected. Last month, the poor numbers led to a sharp sell-off in US equities which saw the Dow Jones Industrial Average lose around 5% over the next few days. It was only Fed Chairman Janet Yellen’s testimony in Washington the following week which triggered a rally that has continued until now.

Now we know that the Fed has had to dial back from the rate hike projections it made in December. Nevertheless, the central bank wants to give the impression that it has every confidence in the US economy. Yet it probably daren’t risk another rate hike this month (or being too hawkish) for fear of triggering a big risk-off move. So while a poor headline payroll number (say, below 160,000) should initially be negative for equities and the dollar, it may reassure investors that the Fed will delay its next rate rise until June or beyond. A strong number (above, say, 220,000 ignoring revisions) should spark an initial increase in risk appetite. But that may not be sustained if the prospect of a June rate hike becomes embedded in the market’s consciousness.

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: Bulletin PM

Category: PM Bulletin


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