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Bank of England sinks Sterling; Nonfarm payrolls and Canada jobs preview

It has been a mixed day for trading in world markets. The Dow continued to hold above 22,000 but remained unable to move much further. The S&P 500 failed to confirm the Dow breakout again. Despite a positive response to Tesla Motors’ better than expected quarterly report sending its shares up 6.5%, the NASDAQ declined again, another sign that the big bull market of the last nine months may be near exhaustion as we approach the weakest and most volatile time of the year for stocks. 

The event with the biggest impact on trading Thursday was the Bank of England deciding to stay firmly in the dovish camp. Traders thinking that based on recent MPC comments the Bank of England was preparing to start raising interest rates were hit with a bucket of ice water and had to scramble to get back on side.  Despite recent hawkish hints, the MPC voted to maintain its benchmark rate at 0.25% with the number of hawkish dissenters falling to 2 from 3 as expected. 

The bigger surprise came from accompanying comments where the bank cut its GDP projections for 2017 (to 1.7% from 1.9%) and 2018. It also indicated that it is using only 2 rate hikes over the next 3 years in its assumptions with the first planned for Q3 2018, a year from now.

Traders expecting the Bank of England to join the hawkish started by the Bank of Canada found themselves caught out on a limb that would cut from under them and scrambled to get back on side. Sterling sold off sharply, dropping nearly a cent against USD following the decision, a big move in forex trading. GBP also weakened relative to the Euro, sending EURGBP back up toward 0.9000. The falling pound had a positive impact on UK stocks, boosting the FTSE to a 0.8% gain on the day. 

Crude oil drifted back 0.6%, weighing on energy stocks and pushing the S&P/TSX into the red. Softening commodity prices and resources currencies could keep a headwind in front of the S&P/ASX today as well. AUD and Australian stocks could be active around today’s Australia retail sales report. 

Employment figures for the US and Canada could have a significant impact on trading heading toward the weekend, particularly in USD and CAD. Nonfarm payrolls are expected by the street to drop back to 180K from 229K last month. ADP payrolls came in below expectations at 178K but the shortfall was more than accounted for by an upward revision to last month. This is important because last month ADP payrolls originally reports at 158K were way below nonfarm. The employment component of the ISM manufacturing report slipped a bit but was in line with its long-term average. Based on all of this, I am thinking we could see 200K for nonfarm this month including a 10K downward revision. 

For Canada, it would not be a surprise to see a slowing in job growth after two spectacular months in a row including a 45K increase last month. Since the last employment report, retail sales, manufacturing sales and new home sales have all come in above expectations, indicating a robust economy, further supported by the Bank of Canada easing back on stimulus and raising interest rates. The street is expecting 10K but has been overly pessimistic all year. I am thinking 25K.  

Friday also brings trade figures for the US and Canada plus more Canadian PMI numbers. The Baker Hughes weekly drill rig count could attract attention, particularly from oil and energy stock traders. During this earnings season, Halliburton indicated oilfield service demand was slowing and a number of US energy producers cut their capital expense budgets. The number of active drill rigs has steadily climbed through July, but signs of a downturn could spark renewed interest in WTI. 

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