Overnight Summary: Not An Algo Was Stirring Ahead Of The Jobs Report
Judging by complete lack of move in the futures since the last time we looked at them at close of US market (if not so much the EURUSD which moments ago touched its lowest level since October 10 below 1.2865), absolutely nothing has happened in the intervening 14 hours. Which wouldn't be too far from the truth. Europe reported its manufacturing PMIs, which while largely unchanged at the consolidated (Eurozone 45.4 on Exp. of 45.3, last 45.3) and core level (Germany 46.0 vs Exp. 45.7, Last 45.7; France 43.7 vs Exp. 43.5, last 43.5) showed some weakness for the one fulcrum country that everyone looks at: Spain, whose Mfg PMI dropped from 44.6 to 43.5 on Exp of 44.1. But at least the threat the ECB will buy its bonds is there. And Speaking of Spain (whose car registrations tumbled 21.7% in October), the first external condition appeared today, when EU competition commission Joaquin Almunia said seized Spanish banks must fire half their workforce, according to ABC.
In other non-news, the Buba's Dombret said that the Troika must decide impartially if Greece gets more aid adding that Greece must help itself to fix the crisis, and that the insolvent country is far behind in implementing reforms and shouldn't rely on the EU to solve its problems - hardly a ringing endorsement ahead of next week's key vote. In Japan, the BoJ minutes showed that a few members said recession cannot be ruled out due to developments in production, while some members said economic recovery may be after start of 2013 due to slowdown in overseas economy, many members said JPY remains elevated and the government made any pretense of central bank indepenence irrelevant after it said the BOJ must continue doing what the government needs.
Finally back in the US, the Fed's Rosengren said the Fed will not stop monetizing until the jobless rate falls below 7.25%. Luckily, with the NFP report due in 90 minutes, and the labor participation rate set to tumble once more, we may just get that in today's key data highlight which everyone is waiting for.
A breakdown of European PMI via MarkIt:
What to expect today (via SocGen):
The US NFPs will be of particular importance today: not only is it one of the traditional market drivers for the USD and US bond markets, but it will also take on a specific value, just four days before the presidential elections.
Last month, NFP was perceived as a strong report as the unemployment rate dipped by 0.3%, to 7.8%, its lowest rate since January 2009. This report, based on a household employment survey, revealed 873K new job creations, the strongest level since June 1983! The NFP report, based on a business survey, was however more cautious, with 114K job creations. On 5 October, the day the September NFP was released, EUR/USD traded in a very tight range (1.2995-1.3075), while 10Y swap rates increased by 6bp. What can we expect from today's data? Although we admit that 10Y US swap rates may try to test a break of 1.80% on a strong report, we doubt investors will embark on huge positions ahead of a heavy risk event calendar next week, with the US elections and the Greek vote before Parliament on its new austerity measures, worth EUR 13.5bn. For the same reasons, EUR/USD is likely to end the week in the lower bound of its 1.28/1.3150 range.
And a full breakdown of all events in the past 24 hours from DB:
Our man in Washington Frank Kelly hosted a fascinating call yesterday on the election. He suggested that it’s so close that he's biting artificial nails which have replaced his actual ones already bitten off! Overall he goes against consensus and thinks Romney might just squeeze a win as he puts more credibility on the polls where he is ahead. He suggests some of the others are volatile and perhaps not as accurate in their sampling. Interestingly he also said it might go down to how wet and cold the weather is in Ohio - seen by many as the swing state. A cold and wet day might favour Romney and a decent day Obama. It’s nice to think that the future fortunes of the Western World might depend on a few clouds here or there.
Today's employment report might still shape the result, especially in a tight race. After last month's conspiracy theories it will be interesting if unemployment holds below 8% (7.9% expected after last month's surprise 0.3ppt fall to 7.8%). With respect to the payroll number, our US economists are content to keep their estimate of October non-farm payrolls at +125K and the same gain in private payrolls, which is in line with the Bloomberg consensus.
US equities started the month on the front foot with the S&P500 (+1.09%) posting its best day since the QE3-inspired performance on 13th September (+1.63%). Utilities were the only sector to trade down where growing political backlash at the delays in restoring power post-Hurricane Sandy weighed on sentiment. It was a relatively strong data day with the October ISM surprising on the upside (51.7 vs 51.0) despite the disappointing Chicago PMI the previous day. Indeed this is the second >50 ISM print in a row although the details were a little mixed . On the positive side, new orders rose from 52.3 to 54.2 (highest since May) which is perhaps a sign that purchasing managers are looking past the impending fiscal cliff. However, Europe is still weighing on activity, as the new exports orders component slipped 0.5 to 48.0.
In overnight markets, Asian equities are trading broadly higher led by the Hang Seng (+1.4%) and Nikkei (+1.2%). Volumes are generally modest with no major regional economic data or news flow ahead of tonight’s payrolls and next week’s US elections. Chinese equities are lagging with the Shanghai Composite down -0.05% as we type, not helped by domestic reports that lending by the big 4 Chinese banks was 40% lower month-on-month in October.
Asian credit markets are mixed with CDS spreads generally outperforming cash. In corporate stories, Sharp admitted that there is "material doubt" about its ability to stay in business as it now expects a year end (to March) financial loss of JPY450bn ($5.6bn), far worse than the JPY250bn loss it expected in August. Sharp's shares are down 4.7% overnight or -76% since the end of last year. The warning came a day after a 19% drop in Panasonic's share price yesterday on the back of disappointing earnings. Panasonic's rating was subsequently downgraded to BBB by S&P, while Moody’s placed it’s Baa1 rating on review for possible downgrade. Japanese tech corporates are receiving some headlines of late as the sector continues to struggle underneath the weight of competition and currency strength.
Back in Europe, the main headline was that the Greek Court of Auditors sees the pension reforms demanded by the troika as unconstitutional, potentially derailing the government’s efforts to push through its EU13.5bn austerity package through parliament next week. The Court of Auditors, which vets Greek laws before they are submitted to parliament, said planned measures could be against constitutional provisions including the “principles of individual dignity and equality before the law” (Reuters). The article does say however, that it’s not the first time the court has expressed reservation on draft bills, citing a finance ministry official. Broader equity markets shrugged off the headline, but the Athens Composite equity index closed down 5% on the day, and is now down 13% on the week.
Turning to the day ahead, aside from the European PMIs, we get an update on the Italian budget balance as well as quarterly earnings from RBS. In the US, oil-giant Chevron will report earnings. But all eyes will be on the employment report due at 12:30pm London time. Remember that the US clocks haven't yet gone back so it’s an hour earlier than usual for many of us.