Thursday’s sessions saw traders in Europe focusing on Monday’s launch of the ECB’s new asset purchase program with continental indices climbing 0.6%-1.2% and EUR falling to test $1.1000. The Dax
broke through 11,500 to another all-time high.
In contrast, US indices struggled to make headway again and USD rallied relative to its peers, and knocked gold back under $1,200 as traders focused on Friday’s nonfarm payrolls report and its potential implications for monetary policy.
With the US employment market really picking up over the last year, there has been a lot of speculation on when the Fed may start to raise interest rates and normalize monetary policy. The consensus call for several months now among analysts, traders and several FOMC members has been for a mid-year liftoff to interest rates with the main focus on the June meeting which also includes member projections and a press conference with Chair Yellen.
Earlier this week, ADP payrolls from the last several months were revised upward substantially indicating an even more robust economy than previously thought and keeping the Fed on track toward a midyear liftoff for interest rates. Traders are now looking to Friday’s nonfarm payrolls report for confirmation of this strength.
For some time there has been a sweet spot of 200K to 250K for markets where a stronger result would suggest a more aggressive Fed and a weaker result would suggest a soft economy. Last month’s increase of 257K was above that and I think a 20K upward revision to closer to 275K appears possible. The street is looking for 235K and the strong ADP payrolls have me thinking 240K looks possible.
The main risk to these expectations is that the loss of high paying jobs in the oil patch could impact both jobs and hourly earnings (wage inflation), but last month, the economy was more than able to make up the difference. This week’s Beige Book report also indicated that lower energy oil prices has had a positive impact on other occupations. For example, while some areas saw oil related layoffs, other areas saw a shortage of truck drivers (lower fuel costs boosting transport demand). The tug of war over jobs from the oil price crash may continue to play out over the next several months.
Heading into Friday’s report, the Dow and S&P have been holding just under all-time highs, while USD has been climbing, indicating expectations for another strong report. Another print above 250K would solidify expectations of a June rate liftoff, while a number in the sweet spot would suggest liftoff between June and September. At this point, it would likely take a result decidedly below 200K and downward revisions to previous months to knock the Fed off course.
A strong report could boost USD even further while a weak report could knock it back. Similarly, a strong number could limit the ability for stocks to advance more in the short-term, but a weak number could be bearish because it’s more likely the Fed would try to wait out a soft patch in the economy rather than undertake new stimulus.
The Fed announced that all 31 banks covered in its latest round of stress tests passed in a severe scenario.
Significant announcements released overnight include:
UK interest rate 0.50% no change as expected
ECB interest rate no change as expected
ECB QE program asset purchases to start Monday March 9th
2015 GDP raised to 1.9% from 1.5%
2016 GDP raised to 1.5% from 1.0%
2015 inflation cut to 0.0% from 0.7%
2016 inflation raised to 1.5% from 1.3%
US jobless claims 320K vs street 295K
US factory orders (0.2%) vs street 0.2%
Canada Ivey PMI 49.7 vs previous 42.6
Germany factory orders (3.9%) vs street (1.0%)
Italy GDP (0.5%) vs street (0.3%)
UK Halifax house prices 8.3% vs street 8.5%
Sweden industrial production 0.8% vs street (0.4%)
Greece unemployment rate 26.0% vs street 25.7%
Upcoming significant announcements include:
7:00 am GMT Germany industrial production street (0.2%)
8:00 am GMT Spain industrial output street (0.3%)
9:00 am GMT Norway industrial production previous 3.5%
9:30 am GMT BoE/GfK UK inflation forecast previous 2.5%
10:00 am GMT Eurozone GDP street 0.9%
8:30 am EST US nonfarm payrolls street 235K vs previous 257K
8:30 am EST US private payrolls street 225K vs previous 267K
8:30 am EST US unemployment rate street 5.6%
8:30 am EST US participation rate previous 62.9%
8:30 am EST US underemployment rate previous 11.3%
8:30 am EST US average hourly earnings street 2.1%
8:30 am EST US trade balance street ($41.2B)
8:30 am EST Canada trade balance street ($1.0B)
1:00 pm EST US Baker Hughes drill rig count previous 1,267
TBA weekend China trade balance street $5.8B vs previous $60.0B