While today's big event is the October Non-farm payrolls print, which with consensus having at 120K and unemployment rising from 7.2% to 7.3%, will be more of a drizzle than a typhoon, there was a spate of events overnight worth noting, starting with Chinese exports and imports both rising more than expected (5.6% and 7.6% vs expectations of 1.9% and 7.4% respectively), leading to an October trade surplus of $31.1 billion double the $15.2 billion reported in August. This led to a brief jump in Asian regional market which however was promptly faded. Germany also reported a greater trade surplus than expected at €20.4bn vs €15.4 bn expected, which begs the question just where are all these excess exports going to? Perhaps France, whose trade deficit rose from €5.1 billion to €5.8 billion, more than the €4.8 billion expected. Of note also was the French downgrade from AA+ to AA by S&P, citing weak economic prospects, with fiscal constraints throughout 2014. The agency added that the country has limited room to maneuver and sees an inability to significantly cut government spending. The downgrade, however, was largely a buy the EURUSD dip event as rating agencies' opinions fade into irrelevance.
Looking at today's payrolls data, the expectation is for a rather modest headline gain of 120k in today’s report and for the unemployment rate to tick up 0.1ppt to 7.3%. As DB observes, the most recent estimates from economic forecasters have virtually all come below the 130k level with a number of estimates under 100k - so it’s fair to say that expectations for the shutdown-affected month of October are biased to the low end. With that in mind, it will be interesting to see how markets react to today’s report, and whether any weakness in October will be interpreted as being transitory. For the record DB is expecting a +130k headline print today, +130k for private payrolls and an unemployment rate of 7.3%. As such, risk for risk is to the downside, as even a modestly stronger than expected number will result in bringing tapering expectations closer if only for the day.
As usual, any hints and rumors of what the Fed may or may not do, especially in the aftermath of the ECB's surprising rate cut, will be driving force for any market moves.
Finally, southeast Asia is literally being rocked right now by Super Typhoon Haiyan, one of the strongest storms ever. The Keynesian inside all of us will immediately proclaim: bullish for GDP.
In addition to payrolls, we also get the monthly personal income and spending reports as well as the UofMichigan confidence survey which is expected to show that sentiment has picked up in November after reaching a year-to-date low in October. Bernanke will be making some remarks at the IMF Annual Research Conference late in the US trading session.
US Data Docket
- US: Change in nonfarm payrolls, cons 120k (14:30), Unemployment rate, cons, 7.3% (14:30)
- Univ. Of Michigan confidence, cons 74.5 (15:55)
- US: Fed speakers - Lockhart (18:00) Bernanke, Fischer and Summers (21:30), Williams (22:00)
Market Re-Cap from RanSquawk
Stocks traded lower in Europe, with the French CAC index under performing its peers after S&P cut French sovereign debt rating. The cautious sentiment supported the more defensive equity sectors, with health care among the best performing for much of the session this morning. Utilities also benefited from an encouraging earnings report by ENEL, with shares advancing around 2%. Despite the risk averse sentiment, combination of profit taking related flows following yesterday’s surge post ECB rate decision, together with the fact that the latest sovereign downgrade adds more pressure on Germany meant that Bunds also traded lower, albeit marginally. Going forward, apart from awaiting the release of the latest jobs report by the BLS, attention will also be on the jobs report from Canada, as well as Prelim. U. Michigan report.
Overnight Bulleting from Bloomberg and RanSquawk
- France cut to AA from AA+ at Standard & Poor's; Outlook revised to stable from negative.
- According to ECB sources, ECB's Draghi is said to have pushed for ECB rate cut at decision yesterday.
- Treasuries steady before report forecast to show U.S. economy added 120k jobs in October with the unemployment rate rising to 7.3% from 7.2%.
- Draghi pushed for yesterday’s rate cut over opposition from Bundesbank President Jens Weidmann and at least two other Governing Council members, according to four euro-area central bank officials
- Pimco is wagering at least $10b in the credit-default swaps market that U.S. corporate bonds will gain as the Fed extends stimulus into 2014, according to traders and investors
- U.K. house prices rose to a record last month as easing credit availability drove buyers back to the market in all regions of England and Wales for the first time in almost three years, Acadametrics said
- Germany’s trade surplus widened to EU20.4b in September, more than forecast; exports gained 1.7%, also more than estimated, while imports fell 1.9%
- The Reserve Bank of Australia forecast below-trend growth and rising unemployment in 2014 as resource investment drops and renewed currency strength drags on the economy, leaving open the chance of lower interest rates
- China’s exports rose 5.6% in October, more than 1.7% median forecast; trade surplus widened to $31.1b, most this year; Communist Party plenum starts tomorrow
- Obama said he’s sorry that thousands of Americans are losing their medical insurance as a result of his health-care law, as his administration works to contain the political damage from the troubled rollout of his signature domestic achievement
- Sovereign yields mostly higher, EU peripheral spreads widen. Nikkei -1.0%, leading Asian stocks lower; Shanghai falls 1.1%. European stocks decline, U.S. equity-index futures gain. WTI crude lower; copper and gold little changed
Chinese Trade Balance (USD) (Oct) M/M 31.10bln vs. Exp. 24.80bln (Prev. 15.21bln) - 10-month high.
- Exports (Oct) Y/Y 5.6% vs. Exp. 1.7% (Prev. -0.3%)
- Imports (Oct) Y/Y 7.6% vs. Exp. 7.4% (Prev. 7.4%)
Chinese Premier Li Keqiang said China's economy has to expand 7.2% per year in order to create 10mln jobs annually.
EU & UK Headlines
France cut to AA from AA+ at Standard & Poor's; Outlook revised to stable from negative.
The ratings agency cited weak economic prospects, with fiscal constraints throughout 2014. The agency added that the country has limited room to maneuver and sees an inability to significantly cut government spending.
According to ECB sources, ECB's Draghi is said to have pushed for ECB rate cut at decision yesterday. Sources said ECB's Weidmann and at least two others said to want to wait for new data adding that Draghi said should not expect too much from monetary policy.
German Trade Balance (Sep) M/M 20.4bln vs. Exp. 15.4bln (Prev. 13.1bln, Rev. 13.3bln)
German Current Account Balance (Sep) M/M 19.7bln vs Exp. 15.0bln (Prev. 9.4bln, Rev. 10.1bln)
French Budget Balance (Sep) YTD -80.8bln vs. Prev. -93.6bln
French Manufacturing Production (Sep) M/M -0.7% vs. Exp. 0.4% (Prev. 0.3%, Rev. 0.9%)
French Industrial Production (Sep) M/M -0.5% vs. Exp. 0.1% (Prev. 0.2%, Rev. 0.7%)
UK Visible Trade Balance GBP/Mln (Sep) M/M -9816 vs. Exp. -9200 (Prev. -9625, Rev. -9957) - Widest since October 2012
The Hill writes that October's jobs report could be dismal, with the effects of the 16-day government shutdown clearly weighing on the figures. Last month's numbers, delayed a week by the fiscal impasse, could run about 110,000, which would be the weakest since July.
Stocks traded lower in Europe this morning as market participants not only reacted to the downgrade of French sovereign debt rating by S&P but also positioned for the upcoming release of the jobs report by the BLS. The cautious sentiment supported the more defensive equity sectors, with health care among the best performing for much of the session this morning.
S&P says no change on systemically important French banks. Of note, S&P cut France to AA from AA+, outlook revised to stable from negative. Separately, S&P's Director Gill says Euro-bank capital shortfall at over 1%.
After a knee jerk move lower by EUR/USD following the downgrade, EUR/USD gradually recovered and edged into positive territory, largely driven by EUR/JPY related flows which staged a decent bounce following yesterday’s heavy selling. As a result, EUR/GBP traded higher, even though shorter-dated implied vols traded flat. Looking elsewhere, RBA cut its 2014 GDP forecast 2%-3% and also cut 2015 GDP forecast to 2.25%-3.25% citing lower mining investment, fiscal restraint and high AUD.
SNB President Jordan said that interest rates will remain low in Switzerland and that there is need to wait to assess impact of ECB rate cut, also noting that low rates may lead to Swiss property bubble risk.
Saudi Arabia cuts oil production in October to 9.75mbpd vs. 10.1mbpd in September.
Iran deputy foreign minister Araqchi said it is too soon to say if on verge of P5+1 nuclear deal, but added he is a bit optimistic. In related news, US Secretary of State Kerry is said to be ready to go to Geneva on Friday if an Iranian nuclear deal reached. Also, Russia said that there are positive changes in the positions of world powers and Iran at Geneva talks, hopes for 'concrete result' China's net crude imports slide to 14-month low on fuel margins, falling 21% against the September high to 20.3mmt, roughly 4.8mln bpd - the slowest rate since August 2012.
China's copper arrivals fell 11.2% in October, coming off an 18-month high in the previous month due to poor price differentials between domestic and international copper markets and as a week-long holiday cut shipments. China October iron ore imports at 67.83mln tons, which is a 9.1% decline from September but up 20.2% on year, according to customs.
The complete overnight recap from Jim Reid of DB
Fascinating day in markets yesterday as 1999 met June 2013 after what was a surprise aperitif from the ECB. The IPO market had the feel of 1999 while the June 2013 reference points to the fact that stronger US data had US equities (S&P 500 -1.3%) facing their worst day since August 27th on renewed fears that tapering may be back on the agenda before March. Though US Q3 GDP brought back tapering fears to equities, treasury markets actually had their firmest day in 3 weeks (10yr yield -4bp) perhaps helped by the surprise move from Draghi. The price action across LATAM reflected that of the DM world as EM equities had another weak day while EM fixed income managed to outperform. Indeed, the MSCI EM equity index recorded its sixth straight loss yesterday in its longest losing streak since August, while a number of sovereign and CDS markets managed to close tighter on the day (though tracking the wides at the close) helped by the firmness in the UST markets. The Brazilian real (-0.7%) and IBOVESPA (-1.2%) were among the underperformers in EM yesterday.
Q3 US real GDP was 2.8% against 2% expectations and with the price index at 1.9% (1.4% consensus), nominal GDP grew at a surprising annualised 4.8% in the quarter. There was mixed views on the real GDP beat though. Many suggested the large inventory accumulation (worth around 0.8%) could mean payback this quarter while on the other side DB's Joe LaVorgna thinks that it’s an appropriate increase given his expectation of an increase in demand. Whatever your thoughts on this, it does complicate matters for the Fed and markets before year-end. Our base case remains slow global nominal growth and a very, very slow taper but perhaps you need sell-offs to cement why it’s going to be tough to taper aggressively. Markets are still very dependent on liquidity in our opinion and days like yesterday perhaps support this. Today's payrolls (more later) is the next big event that could re-shape or add to this crucial debate.
Back to the US GDP report, the contradiction was the 0.5% increase over expectations in the price index which goes against what we've seen elsewhere in the world of late. Indeed the ECB cut yesterday due to the lower inflation risks. Draghi was careful to say he saw no deflation risks but then again he couldn't really say anything else in his position. Given that very few saw inflation going this low in Europe in 2013 it’s impossible to rule out further flirtation with deflation in 2014. A 25bp rate cut is unlikely to make too much difference unless the currency continues to fall aggressively so Draghi must be hoping global activity pulls European inflation up in 2014 or he'll have some very awkward unconventional policy discussions coming up. He wasn't that convincing yesterday when asked about what policies he had left if indeed they did need to act further.
The tone in Asia this morning is also weaker as markets digest a poor day for stocks yesterday. China’s trade data for October has provided regional markets with a brief excuse to rally overnight but the initial excitement has been faded. China’s October trade surplus reached $31bn (vs $15bn previous month) thanks largely due to a consensus beating export number (5.6% YoY vs 1.7% expected). Exports also managed to bounce back from last month’s -0.3% print. October imports also beat consensus, coming at 7.6% against median estimates of 7.4%. Losses in equities are being led by the Shanghai Composite (-0.6%) and Nikkei (-0.9%). There has also been some focus on the effects of a Category 5 hurricane which made landfall in the Philippines earlier today. Elsewhere as we go to print, S&P 500 futures are up 0.16% and UST yields are unchanged at 2.60%. France was downgraded to AA from AA+ by S&P overnight as we type.
Onto today’s payrolls, the expectation is for a rather modest headline gain of 120k in today’s report and for the unemployment rate to tick up 0.1ppt to 7.3%. Interestingly the most recent estimates from economic forecasters have virtually all come below the 130k level with a number of estimates under 100k - so it’s fair to say that expectations for the shutdown-affected month of October are biased to the low end. With that in mind, it will be interesting to see how markets react to today’s report, and whether any weakness in October will be interpreted as being transitory. For the record DB is expecting a +130k headline print today, +130k for private payrolls and an unemployment rate of 7.3%.
Turning to the day ahead, French and German September trade numbers are scheduled early this morning as well as French industrial production. US payrolls will be setting the tone for the latter half of the day, which will be released at the same time as personal income/spending numbers for September. The UofMichigan confidence survey is expected to show that sentiment has picked up in November after reaching a year-to-date low in October. Bernanke will be making some remarks at the IMF Annual Research Conference late in the US trading session. Over the weekend, China’s inflation, industrial production and retail sales numbers for the month of October will be released. China’s much awaited Third Plenum meeting gets underway tomorrow where DB’s Jun Ma expects a wide ranging package of reforms will follow, in terms of industry deregulation, financial liberalisation, reforms to land titles, state-owned enterprises and social security.