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Acronym Week Closes With All Important NFP
A week that has been all about acronyms - GDP, PMIs, FOMC, ECB, BOE, ADP, ISM, DOL, the now daily record highs in the S&P and DJIA - is about to get its final and most important one: the NFP from the BLS, and specifically an expectation of a July 185K print, down from the 195K in the June, as well as an unemployment rate of 7.5% down from 7.6%.
The number itself is irrelevant: anything 230 and above will be definitive proof Bernanke's policies are working, that the virtuous circle has begun and that one can rotate out of everything and into stocks; anything 150 or below will be definitive proof the Fed will be here to stay for a long time, that Bernanke and his successor will monetize everything in sight, and that one can rotate out of everything and into stocks, which by now are so disconnected from any underlying reality, one really only mentions the newsflow in passing as the upward record momentum in risk no longer reflects pretty much anything.
Speaking of newsflow, here is what would have otherwise mattered. First, in bulletin format, via Bloomberg:
- Treasuries fall, with 10Y yields near 2-year highs, before report forecast to show nonfarm payrolls rose +185k in July from +195k the previous month, unemployment rate fell to 7.5% from 7.6%.
- 10Y yields yesterday rose the most since July 5 on stronger than forecast initial jobless claims and ISM manufacturing and as S&P 500 closed at a new record high; spread to bunds at widest since 2006
- Private-equity managers from Fortress Investment Group LLC to Blackstone Group LP say now is the time to exit investments as stocks rally and interest rates start to rise
- Toyota Motor Corp. raised its profit forecast by 8% as the weaker yen bolsters the value of Japanese cars sold overseas
- Japan Cabinet Office releases revised economic forecasts, raises GDP growth forecast to 2.8% for year ending March 2014, up from 2.5% projection in February
- China’s 2H export outlook is “not optimistic” as shown by leading indexes, trade situation is “complicated and grim,” People’s Daily reports today, citing China Commerce Minister Gao Hucheng
- China will keep basic yuan exchange-rate stability and prevent financial risks, according to the 2Q monetary policy implementation report posted on PBOC website
- Silvio Berlusconi’s conviction for tax fraud, confirmed late yesterday by Italy’s highest court, increased tensions in parliament and threatened to undermine Prime Minister Enrico Letta’s government
- German economists see 50% haircut on Greek debt as unavoidable, according to Die Wely
- Bank of America said federal and state agencies plan to press more civil claims tied to mortgage and debt offerings, signaling the firm faces another round of legal battles tied to home loans and underwriting
- U.S. investigators have uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating a benchmark for interest-rate derivatives
- Sovereign yields uniformly higher. Nikkei +3.3% as JPY declines toward 100 level. European equities mostly higher, U.S. stock index futures gain. WTI crude little changed, copper higher; gold falls
The full overnight market recap:
Heading into the North American open, stocks in Europe are seen broadly flat and traded in a relatively tight range this morning, with health care outperforming, as market participants remained on the sidelines ahead of the key jobs report from the BLS. There was little in terms of fresh macroeconomic news flow, but it was reported citing sources that the ECB will complete an assessment of top banks' assets in February which will allow the next round of stress tests to begin in May. The asset quality review is part of a broader balance sheet review of the region's 130-140 largest banks. Elsewhere, UK macroeconomic data continued to surprise to the upside and the latest Construction PMI survey showed that the activity rose to its highest level since June 2010. As a result, GBP outperformed its peers, with GBP/USD trading up around 50pips as a result, while EUR/USD is flat in spite of the fact that the 1y/1y EONIA forward rate rose to its highest since late June.
Going forward, market participants will get to digest the release of the latest jobs report from the BLS, Factory Orders report and also scrutinise comments by Fed’s Bullard who is due to speak on economy in Boston.
Asian Headlines
BoJ is said to be mulling ways to prod Abe to keep tax hike, citing worries over economic growth, according to sources. Furthermore, members may convey concerns to government officials at next week's policy meeting. Japan raises real GDP forecast for FY2013 to 2.8% from 2.5%, overall CPI forecast unchanged at 0.5% in FY2013.
China commerce minister Gao Hucheng said that China can meet its 2013 trade target. Gao commented that China's H2 export outlook is pessimistic although the nation's trade situation is complicated and grim.
PBoC says to continue to implement prudent monetary policy and fine tune policy when necessary.
EU & UK Headlines
UK Construction PMI (Jul) M/M 57.0 vs. Exp. 51.5 (Prev. 51.0) - highest since June 2010.
ECB says banks to repay EUR 1.8bln from 1st LTRO and EUR 333mln in 2nd LTRO
The ECB will complete an assessment of top banks' assets in February which will allow the next round of stress tests to begin in May, according to sources. The asset quality review is part of a broader balance sheet review of the region's 130-140 largest banks.
IMF's Lagarde said that there is no reason to think Europe won't deliver on Greece and added that Europeans said they would consider more aid for Greece.
Analysts at RBS note that Draghi's reluctance to say if rate cuts were requested yesterday shows a form of dynamics which undermines market confidence in the central bank. Furthermore, the central bank has trapped itself into delivering lower short-term rates via refi cuts as Draghi's tone didn't spark confidence in the bank's reaction function.
US Headlines
Mr. Obama is now in the process of interviewing three candidates for the position at the helm of the central bank: Mr. Summers; Janet L. Yellen, the vice chairwoman at the Federal Reserve, who had generally been considered the front-runner for the job; and a dark horse for the post, Donald L. Kohn, a former Fed vice chairman.
Equities
Heading into the North American open, stocks in Europe are seen broadly flat and traded in a relatively tight range this morning, with health care outperforming, as market participants remained on the sidelines ahead of the key jobs report from the BLS. In terms of notable stock movers, RBS shares fell around 5% this morning, that’s in spite of posting H1 profits of GBP 1.4bln. The bank also announced that retail banking boss Ross McEwan will replace Stephen Hester as chief executive from October 1.
FX
UK macroeconomic data continued to surprise to the upside and the latest Construction PMI survey showed that the activity rose to its highest level since June 2010. As a result, GBP outperformed its peers, with GBP/USD trading up around 50pips as a result, while EUR/USD is flat in spite of the fact that the 1y/1y EONIA forward rate rose to its highest since late June.
AUD/USD fell to a near 3-year low of 0.8889 overnight after the Australian government revised its 2013/14 GDP growth target to 2.5% from 2.75%. Fitch said Australia rating remains AAA, outlook stable.
Commodities
China repeated its opposition to tougher US sanctions on Iran after the House of Representatives approved a bill aimed at halting Iran's oil exports.
Mexican President Enrique Pena Nieto said that his sweeping energy reform, which is expected to include constitutional changes to lure private investment to help stem a slide in output, will be presented to Congress next week.
Chinese state-owned steelmakers are preparing to enter the Singapore-based iron ore swaps market, in a move that could boost liquidity in iron ore derivatives as firms look to hedge volatile prices.
Turkish gold imports fell to 37 tonnes in July, down from 44 tonnes a month earlier. China steel output to slow in H2, 2013 output seen at 780mt, according to NDRC.
* * *
DB's Jim Reid recap the balance of the overnight news
We’ve finally reached “payrolls Friday” after what has been a big week of macro events. We’ll preview what’s expected from today’s all-important NFP below, and we’ll also review some of what the ECB had to say yesterday as well as the dataflow.
Starting with today’s’ payrolls the expectation from DB is for a headline print of +225k which, for the record, is at the very top of Street estimates and about 15K higher than the next highest estimate from another bank. If we do get a +225k number today, it would be the highest July payroll number since 2005.
The Bloomberg median consensus is still around 185k, but a number of estimates in the last 24 hours have been in the 190-210k range - due in part to yesterday’s above-consensus ISM reading and Wednesday’s +200k ADP employment report. As we wrote on Monday, any number above 200k will certainly further increase the odds of a September taper. The consensus estimate for private payrolls +195k (vs 202k last month), and economists are expecting 0.1ppt drop in the unemployment rate to 7.5% (DB expect +230k and 7.4% respectively).
Leading into tonight’s payroll, Asia is trading with a stronger tone, taking the lead from the US market. All major equity indices are trading higher led by gains in the Nikkei (+1.6%). The USDJPY’s 1.7% gain yesterday is also helping sentiment there. A Japanese equity story of note is Suzuki Motors who have raised their FY net profit forecast by 11%, citing a weaker yen and better than expected Japanese and Asian sales. Gains are being seen on the Hang Seng (+0.6%), KOSPI (+0.2%) and ASX200 (+1.0%) while S&P500 futures are currently +0.1%. Asian EM credit is trading a touch wider overnight following the underperformance of EM credit yesterday. The Asia IG index is about 1bp wider this morning. Continuing the recent theme of USD strength, the Australian dollar touched an overnight low of 0.889 vs the USD. Also in Australia, the government announced that its budget deficit will widen to A$30bn this fiscal year on a slowing economy and rising unemployment, wider than an estimate in May of A$18bn.
Over the last two days, UST yields have traded in a 16bp trading range, coming from a low of 2.56% following the FOMC’s dovish statement on Wednesday to a high of 2.72% shortly before the US close yesterday. Yields are now 125bp higher than the mid-2012 lows, but it was pointed out that current levels are not too different from the average yield since 2009 of 2.66%. It was also interesting to note that the UST 2s/30s curve reached its steepest level in around two years at the closing bell. In terms of yesterday’s price action though, it was pretty much a one-way train for treasuries with yields starting the day at around 2.59%, before they got a quick bump up to around 2.65% following the release of better than expected US jobless claims (326k vs 345k expected and 345k last week). This was followed promptly by an aboveconsensus July manufacturing ISM (+4.5pts to 55.4 vs 52.0 expected) which saw yields reach a late high of 2.72%. In the detail of the ISM report, DB’s US economists noted the improvement across new orders (58.3 vs. 51.9) and production (65.0 vs. 53.4). The former is at the highest level since April 2011 (63.8), while the latter is now at the highest level since May 2004 (63.5). New export orders also remained in growth territory (53.5 vs. 53.5) and employment increased meaningfully (54.4 vs. 48.7) which was sufficient for our economists to raise their forecast for today’s payrolls by 25k to 225k. Despite the strong performance of the S&P500 (+1.25%) yesterday, EM continued to underperform amid higher US rates and stronger USD.
There was also plenty of news to digest out of Europe yesterday including Draghi’s post-ECB comment that “current expectations of rate hikes in money markets are, according to our assessment, unwarranted”. DB’s Gilles Moec believes that the "Carney-like" mention could have been a significant step up to "pricing guidance", but he notes that this came up in the Q&A, not in the prepared statement and when offered the opportunity by a journalist to "nail the point home" Draghi passed on the opportunity. Gilles interpretation is that Draghi may have been "ahead of the Council" on this particular signal. In general, the press conference reflected, in his view, a sense at the ECB that it can for now "take a pause". The Bank of England left policy unchanged and we’re left to wait until next week’s quarterly inflation report (Wednesday) in which Carney will give his first press conference since taking office in July. While yesterday’s US data was fairly positive, so was the dataflow in Europe.
The final Euro-area manufacturing PMI printed at 50.3 which is 0.2pt up on the flash estimate. Italy recorded its first >50 reading in two years and the PMI report featured the smallest dispersion across countries since 2005. DB’s economists believe that July’s PMIs represent a convincing move towards manufacturing recovery in the euro area. On the political front, there was a relatively muted reaction to the news that former Italian PM Silvio Berlusconi lost his final appeal against a tax-fraud conviction, though we note the headlines came after European markets had closed. The ruling gives Berlusconi his first definitive guilty verdict, according to Reuters. The judges sent the case back to the appeals court to review a five-year public office ban imposed by the original verdict. A number of Berlusconi allies said to the media that the ruling would not hit the coalition between Letta's center-left Democratic Party and Berlusconi's People of Freedom (Reuters).
The day ahead will be dominated by the lead up and reaction to the US payroll report. Aside from that, an update on Spanish unemployment, US factory orders and US personal income/consumption are scheduled. Earnings reports from Chevron, Berkshire and RBS are also worth watching today.
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