Stock markets around the world have continued to recover overnight with European indices and US index futures trading moderately higher this morning. Crude oil has also been picking up again. Overall, markets continue to turn the corner but gains have been subdued ahead of today’s US and Canada employment reports with traders encouraged but wary of getting too far out on a limb ahead of today’s big numbers.
USD’s free fall has stopped for now following last night’s comments from Cleveland Fed President Mester which indicated the hawks haven’t thrown in the towel on a March rate increase. The greenback has bounced back moderately against some currencies, particularly GBP which continues to underperform in the wake of yesterday’s Bank of England forecast cuts. AUD is also down slightly following last night’s neutral RBA monetary policy
report. Oil sensitive currencies are mixed with CAD outperforming NOK and RUB ahead of today’s Canada employment and PMI figures.
The main focus for traders today is on nonfarm payrolls and what the report could mean for the Fed’s interest rate normalization plans. Although there isn’t a FOMC meeting this month, recent speculation on what the Fed may do in March has had such a big impact on USD trading this week, nonfarm payrolls could still attract a lot of attention from traders. The report may give an indication of whether the recent volatility has had any impact on the broader US economy (unlikely IMO) and could influence Fed thinking.
Comments this week from FOMC members suggest three factions emerging at the Fed over what to do next which could make for a lively discussion over the next six weeks.
A dovish group worried about the impact of overseas market volatility and economic softness on the US economy and apparently willing to slow or stop the pace of rate increases. This includes New York Fed President Dudley and Governor Brainard.
A middle group taking a wait and see approach which includes Dallas Fed President Kaplan
A hawkish group who understands market volatility is par for the course and part of the transition process following first rate hike, so there’s no reason to change course from the gradual tightening plan. This group includes Cleveland Fed President Mester and Kansas City Fed President George.
At the beginning of this year, the FOMC party like had been calling for four rate increases this year, but the discussion above shows this has fractured which contributed to USD support finally giving way earlier this week. Today’s payroll report could accelerate or put the brakes on the USD selloff.
ADP payrolls came in at 205 K a bit above expectations with a moderate upward revision to last month. Having been caught out as too bearish last month, and considering the big increase in Chicago PMI and better winter overall this year, I’m thinking a bit above street at 225K with the potential for a downward revision to last month’s very strong 292K result.
The impact of nonfarm payrolls on markets is similar to previous reports for currencies IMO.
Below 150K would support the slow down case and likely send USD even lower
150K-250K would be neutral and help USD to stabilize at a lower level.
Above 250K would keep a March rate hike firmly on the table and likely spark a bounce in USD.
For stocks the potential reaction is a bit more muddy, depending on whether easy money or earnings prospects are more important to traders. A weak result would mean rates are likely to stay low which would keep the easy money party going but would also suggest a weak economy and weak prospects for corporate earnings. A strong report would confirm the end of the liquidity party but indicate better prospects for companies. Because of this, we could see significant swings
in both directions after the report regardless of what happens while traders figure out what to make of it.
For Canada, the street is expecting a 6K increase after a 22K jump last month. I think we’ll see a retrenchment in part-time and a bounce in full-time with the new year for a 15K increase overall. It would likely take a really negative result or a big drop in oil sending WTI back under $30 to derail this week’s recovery trend in CAD and Canadian stocks.
Symantec $0.26 vs street $0.24, $500M strategic investment from Silver Lake, $4.00 per share special dividend
Significant announcements released overnight include:
Australia construction PMI 46.3 vs previous 46.8
Australia retail sales 0.0% vs street 0.4%
Japan leading index 102.0 vs street 102.7
Germany factory orders (2.7%) vs street (1.4%)
Sweden industrial production 0.3% vs street 3.5%
Norway industrial production (2.0%) vs previous (1.8%)
Upcoming significant announcements include:
8:30 am EST US nonfarm payrolls street 190K vs previous 292K
8:30 am EST US private payrolls street 180K vs previous 275K
8:30 am EST US unemployment rate street 5.0%
8:30 am EST US participation rate previous 62.6%
8:30 am EST US average hourly earnings street 2.2% vs previous 2.5%
8:30 am EST Canada employment net change street 6K vs previous 22K
8:30 am EST Canada full-time jobs previous (6K)
8:30 am EST Canada part-time jobs previous 29K
8:30 am EST Canada unemployment rate street 7.1%
8:30 am EST Canada trade balance street ($2.2B)
8:30 am EST US trade balance street ($43.2B)
10:00 am EST Canada Ivey PMI street 49.5 vs previous 49.9
1:00 pm EST US Baker Hughes drill rig count previous 619
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