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Futures Slide More Than 1%, At Day Lows Ahead Of "Rate Hike Make Or Break" Payrolls
Moments ago, US equity futures tumbled to their lowest level in the overnight session, down 22 points or 1.1% to 1924, following both Europe (Eurostoxx 600 -1.8%, giving up more than half of yesterday's gains, led by the banking sector) and Japan (Nikkei -2.2%), and pretty much across the board as DM bonds are bid, EM assets are all weaker, oil and commodities are lower in what is shaping up to be another EM driven "risk off" day. Only this time one can't blame the usual scapegoat China whose market is shut for the long weekend.
As Bloomberg's Richard Breslow points out, "yesterday, China being closed was a source of calm for the markets. This morning their being closed is seen as a lack of liquidity with traders looking elsewhere for hedges." He adds that "Draghi’s dovish comments from yesterday are being rediscussed as not hurrah for QE, but geez things must be really bad out there." And while the biggest risk event of the day will the nonfarm payroll print in just two hours, leading to much sought after clarity from the Fed as any number 190,000 or below cements the case of a rate hike delay, it was yesterday's G-20 statement language that "monetary policy tightening is more likely in some advanced economies" that precipitated a mini flash crash in the E-mini shortly thereafter and has led to the unwind of the Yen carry trade, pushing both the USDJPY under 119 and the ES to its low of the day.
Asia stocks traded lower despite the mostly positive close on Wall Street as the dovish ECB inspired gains were pared on position squaring ahead of today's key NFP release. Nikkei 225 (-2.15%) led the region lower as a cautious tone at the open saw JPY strengthen and pressure exporters, while ASX 200 (-0.1%) was weighed by weakness in energy and financials. The Hang Seng (-0.45%) traded negative on its return from Victory Day, after Hong Kong PMI (44.4 vs Prey. 48.2) printed its lowest reading since Apr'09 and new orders from China narrowed the most since 2008. JGBs traded higher as the demand for safer assets increased on the back of the cautious tone in the region, while the BoJ also entered the market to buy JPY 450b1n government bonds further stoking demand for 10yr JGBs.
Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday's ECB inspired surge in stocks and also positioned for the release of the crucial US monthly jobs report. As per the recent trend, the downside was led by energy names, while the 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern.
Bunds benefited from the flight to quality trade, with shorter-dated peripheral bond yield spreads continue to outperfor m10s equivalent, with the bid tone said to be supported by domestic accounts, especially Italian and Spanish based. The release of less than impressive retail PMIs, together with much weaker than expected German factory orders data which printed biggest fall since January further buoyed the bid tone in fixed income products.
In FX, safe haven related flows saw JPY gain across the board, with USD/JPY fell to its lowest level since 25th August after the pair took out stops on the break of 119.00 level and also the 50% retracement level of the 24th to 31st August move. Consequent USD weakness ensured that EUR/USD traded higher, in spite of the dovish rhetoric by the President of the ECB yesterday. Elsewhere, commodity sensitive currencies remained under pressure amid lower energy and base metal prices.
In the crude space, both WTI and Brent crude futures traded lower, weighed on the cautious sentiment which dominated the price action ahead of the eagerly awaited US monthly jobs report. Of note, despite the recent choppy price action, the CBOE Crude oil ETF volatility index has come off its highs over the past several sessions, but nevertheless remains elevated and trades at March levels.
Today's main event is of course the payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
Market Wrap:
- DAX -2%, Nikkei 225 -2.2%
- German 10Yr yield down 4bps at 0.68%
- Brent futures down 0.8% at $50.28/bbl
- Euro spot +0.2% at 1.1141
- V2X up 14% at 34.1
- S&P 500 futures down 1.1% at 1925
Bulletin Headline Summary from RanSquawk and Bloomberg
- Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday's ECB inspired surge and also positioned for the NFP release
- 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern
- Looking ahead, highlights include US Nonfarm Payrolls, US Unemployment Rate and Fed's Lacker making a case against further rate hike delays
- Treasuries gain as stocks decline before report forecast to show U.S. added 217k jobs in August while unemployment rate fell to 5.2% from 5.3%.
- Deputy PBOC governor Yi Gang, said China’s economy is solid despite the stock market selloff and that the yuan will be stable; signaled China won’t get dragged into tit-for-tat currency valuations
- UBS lowered its target for Hong Kong’s benchmark stock gauge by 25%, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline
- Far from weakening the Chinese military, the troop cuts announced by President Xi Jinping will help counter U.S. advantages and improve the country’s ability to project force further from its shores
- Prime Minister David Cameron yielded to pressure over the migration crisis engulfing Europe and said Britain will take in “thousands more” refugees from Syria
- Vice President Joe Biden opened up for the first time publicly about his painful deliberations over whether to run for president so soon after his son Beau’s death to brain cancer, saying the key question is “whether my family and I have the emotional energy to run”
- Sovereign 10Y bond yields lower. Asian and European stocks fall, U.S. equity-index futures decline. Crude oil, gold and copper decline
US Event Calendar
- 8:10am: Fed’s Lacker speaks in Richmond, Va., speech titled "the case against further delay"
- 8:30am: Change in Non-farm Payrolls, Aug., est. 217k (prior 215k)
- Change in Private Payrolls, Aug., est. 204k (prior 210k)
- Change in Mfg Payrolls, Aug., est. 5k (prior 15k)
- Unemployment Rate, Aug., est. 5.2% (prior 5.3%)
- Average Hourly Earnings m/m, Aug., est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, Aug., est. 2.1% (prior 2.1%)
- Average Weekly Hours All Employees, Aug., est. 34.5 (prior 34.6)
- Underemployment Rate, Aug. (prior 10.4%)
- Change in Household Employment, Aug. (prior 101k)
- Labor Force Participation Rate, Aug., est. 62.7% (prior 62.6%)
- G-20 finance ministers, central bankers meet in Ankara
DB's Jim Reid concludes the overnight recap
As we discussed in our 'Back to School' credit strategy note earlier this week we think the global financial system is so fragile and the global economy so lethargic and asset prices generally so high (with exceptions) that it near forces central banks into a continuation of easy monetary conditions. So while our inclinations are to be bearish we are not due to what is still extraordinary global central bank liquidity and the promise of more to come. For now the ECB have laid the groundwork for such an occurrence.
More on the ECB later but next stop payrolls. As we noted yesterday, DB’s Joe Lavorgna has been highlighting that August tends to be a seasonally weak month for payrolls reports. Joe highlights in particular that the August reading has missed consensus expectations in 21 out of the last 27 years. The last four August payrolls reports have come in below consensus, averaging a 55k miss, while the data is even more compelling the further you go back in time. Since 1988 the average forecasting error has been -61k in the month of August while the median forecast error sits at -42k. Joe also highlights that even in relatively strong years for hiring there are typically pockets of payrolls weakness. Taking the three strongest years for hiring in the last four decades, in 1977 the US economy generated 4m jobs, yet there were three months when payrolls were very disappointing: June (135k), August (92k) and October (119k). The same happened in 1978 when despite generating 4.3m jobs, payrolls dipped well below trend in April (175k), August (113k) and September (-58k) while in 1984, when 3.9m jobs were added, August was again one of the three months of relative softness. So Joe’s forecast is for 170k while the market is sitting at 217k.
We head into today’s print with a September hike probability currently priced at 30%, down slightly from 32% this time yesterday. Meanwhile, it’s been a weak session across Asian equity markets this morning although with not a lot in the way of newsflow. The Nikkei (-2.65%), Kospi (-1.41%) and Hang Seng (-0.60%) have all seen declines while the ASX (+0.29%) is a touch higher. Treasury yields have fallen a couple of basis points, while S&P 500 futures are indicating a soft start, down around half a percent. Oil has softened too, down around a percent while credit indices in Asia are largely unchanged.
Staying in Asia briefly, our China Chief Economist Zhiwei Zhang published an interesting note overnight evaluating the risk of capital outflows in China. Zhiwei’s view is that he thinks the problem of capital outflows is manageable. He highlights that a common misconception in the market is that a decline of foreign reserves is equivalent to capital outflows. He notes however that what happened from July 2014 to July 2015 is that, while foreign currency reserves, managed by the SAFE, dropped by some $350bn, the PBoC’s net foreign assets only declined $82bn, which was more than offset by a rise of private foreign assets held in domestic banks ($188bn). As a result, the net foreign asset position of the entire banking system actually rose in this period. Zhiwei estimates the size of PBoC intervention in August to be between $100bn and $150bn, but only a fraction have turned into capital outflows. This is different from the balance of payment crises which happened in other emerging markets with open capital accounts, where capital flight led to a downward spiral. Ultimately the real challenge the PBoC faces is how to exit the current arrangement and what new ER regime it should follow. More details on Zhiwei’s piece is in the link at the bottom of today's note.
Back to the ECB, the staff growth and inflation forecasts were revised down, a little more than our economists expected with the Council seeing downside risks. Draghi repeatedly mentioned EM which was a signal that they're concerned and as DB's Mark Wall suggested, the rhetoric on the willingness to respond was dialled up to “willingness, readiness and capacity to act”. Supporting this was the decision to raise the issue limit on individual securities purchases to 33% from 25%. So they have given themselves room to act although there was no discussion on the immediate use of this facility so its use would require fresh info. Nevertheless this should create a mini ECB put on financial assets if turmoil returns.
The dovish stance saw reasonable downward pressure on European rates yesterday. 10y Bund yields fell nearly 6bps (-5.8bps) to 0.722% while the moves were more exaggerated in the peripherals with the likes of Portugal and Italy falling 11bps and 7bps respectively. The Euro tumbled and eventually finished the session down 0.93% at $1.112 while risk assets benefited from a decent bid. The Stoxx 600 closed up 2.37% while there were +2% moves for bourses in Germany, France and Italy too. Credit markets also had a decent day with Crossover eventually finishing 10bps tighter while the comments also helped spark a brief 4% surge in the Oil complex, before WTI and Brent settled down but still up 1.08% and 0.36% respectively.
These moves were in contrast to what felt like another nervous session across the pond. The S&P 500 got off to a decent ECB-boosted start, reaching an intraday high of 1.3% although that marked the high in optimism as the market then proceeded to sell-off once markets in Europe closed, eventually settling +0.12% at the closing bell with anxiety levels clearly on the rise ahead of today’s big data release. The Dow (+0.14%) traded in similar fashion but it was a weak day in the tech space with the Nasdaq (-0.35%) down and dipping back into negative territory for the year in the process.
Yesterday’s dataflow in the US contributed to the better tone early in the session. Much of the focus was on the August ISM non-manufacturing reading which, while declining 1.3pts from July came in nearly a point ahead of expectations at 59.0 (vs. 58.2 expected). The important employment subcomponent declined to 56 last month, from 59.6 but more importantly still sits at the high end of its post-recession range. Initial jobless claims rose 12k last week to 282k (vs. 275k expected) while there was some improvement in the final services PMI reading for August, revised up 0.9pts to 56.1 which helped keep the monthly composite reading unchanged at 55.7. Meanwhile the July trade balance showed a slightly smaller than expected deficit for the month, shrinking over 7% to $41.9bn (vs. $42.2bn expected) and the smallest gap now since February. That print, along with the non-manufacturing ISM and vehicle sales data from a couple days ago saw the Atlanta Fed upgrade their Q3 GDP forecast 0.2pp to 1.5%.
Just staying on the data briefly, Europe saw some positive numbers too yesterday. Of most significance was the final composite Euro area PMI reading for August, revised up 0.2pts to 54.3 and to a new cyclical high and a reading which our colleagues in Europe believe supports their 0.5% qoq GDP growth forecast for Q3. With the exception of France, regionally the data was supportive also. Germany saw the composite reading revised up 1pt to 55.0 thanks to a strong services print. Spain was nudged up 0.5pts to 58.8 while a 2.6pt revision upwards in Italy’s services reading saw its composite print hit a new cyclical high of 55.0. France was the clear disappointment however with the composite down to 50.2 after downward revisions of over 1pt in both sectors.
Before we turn over to the day ahead, DB’s George Saravelos published his latest report on Greece yesterday, reviewing the two major developments we saw in August - the conclusion of the 3rd ESM program and the precipitation of a new general election on September 20th. George believes that the ingredients are in place for a stable political outcome after the general election, irrespective of which of the two major parties comes first (Syriza or New Democracy). Beyond that, George expects it to be political rather than financial risk that will continue to drive Greek developments going forward. The economy is set to suffer under the recent imposition of capital controls and large upfront fiscal tightening, but the worse could well be behind us by the turn of the year. Greece’s willingness to constructively, rather than confrontationally, engage with creditors will ultimately determine whether Eurozone membership can be sustained. In turn, this will depend on strong popular support towards the euro persisting which has so far survived unscathed despite the recent crisis. Ultimately, the ingredients may be in place to generate a gradually improving outlook in coming months. Key dates for our diary in the meantime will be the September 12th Eurogroup meeting where the prior actions required to unlock the second sub-tranche of the first loan installment will be discussed. This is followed two days later by a TV debate between party leaders Tsipras and Meimarakis which will likely have a large influence on public opinion.
Onto the day ahead now. It’s relatively quiet on the data front in Europe this morning with just German factory orders and French consumer confidence prints due. The main event is of course this afternoon in the US with the aforementioned payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
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the numbers will miss, even though the ministry of truth is not to be trusted.
the insiders already know the results. just another down day in the land of fedspeak...
190k or lower shuts down the rate hike?...That looks like a pretty low bar. But I think they love the game they're playing right now, so my guess is 193K
Rate hike.....double dog dare you bitchez.
Want to see 2000 points down? Go nuts kids.
The unemployment data in the land of the free are a joke. Official unemployment is 5.3% while real unemployment is well north of 20%.
So who can believe the Payrolls data to be released today?
Paul Craig Roberts Rages "Free Financial Markets Are A Hoax"There are no free financial markets in America, or for that matter anywhere in the Western word, and few, if any, free markets of any other kind. The financial markets are rigged by the big banks, the Federal Reserve, and the Treasury in the interests of the profits of the few big banks and the dollar’s exchange value, which is the basis of US power.
http://www.zerohedge.com/news/2015-05-28/paul-craig-roberts-rages-free-f...
Don't lose any sleep over the gvt #'s, and juggleing them can lead to dizzyness.
so i look at the s & p chart and see a dead cat bounce with 8 percent decline from top of 2100.
is the next leg down with a bouce called the dead fish bounce?
This dead cat did not hit the ground and bounce. It hit an awning on the 3rd floor, and then bounced up. It's going to miss that awning on the way back down.
I thinky it's called gold fishes, bitches!
Bullish
Futures grinding lower.... jobs will come in above expectations.
The good news is you only have to fight for your life for 30 more years after the grinding is done, jobs or no jobs, good luck with that.
Don't look now but the BRICS are falling!
The Squirm-merging markets are not looking good. This article from Bloomberg pretty much sums it up for the Brazil story. It is just STARTING to get ugly down there. The finance dude who was handed the job of "fixing" the mess is now looking like the pics of Saint Sebastian on a good day (funny how all the pics like in the Louvre show his face and how much he enjoys being a human arrow pincushion!!).
So Brazil is Greece, except without the Brussels sugardaddy. Oops. Tourists: bring extra Euros or Buckees with you for the Limpics. Brazil will need some hard currency by next year.
http://www.bloombergview.com/articles/2015-09-03/brazil-s-political-jung...
The good news is that the brazilian kids are okay, they refuse to wait till next year, they want their currency, NOW!
Merely a dataapoint how the computers trade before the humans are allowed into the casino.
We are watching Weimar Germany revisited with an all Jewish controlled banking, education, judicial, and governmental control. Get them out goddamn it they have done enough damage! We are being played for fools and they continue thier raping of America with the same old games and if you dfisagree you are Anto Semetic. Facts do not make you anti semetic or racist!
And fool me once, shambers on me, fool me twice, shambers on you.
Embargo-ohmyeffingodthesenumbersuck.
The stock market has become an entitlement for the top 3%.
Just like the bottom 90% have welfare and food stamps, the rich need ever climbing stock valuations to help them afford caviar and dom perignon, its very hard to afford these things on an income of only a million a year or more, so the fed will just have to print and buy up whatever falls.
Finally, someone here said it.
http://www.reuters.com/article/2015/09/04/us-markets-global-bonds-analys...
Investor flight from U.S. stocks fails to lift bond market
NEW YORK | By Gertrude Chavez-Dreyfuss
The "flight to safety" into bonds many expected when U.S. stocks slumped last week never took off, making big losers out of prominent fund managers and further confusing investors at a volatile time in the market.
Stocks plunged in the second half of August, largely on fears of China's worsening economy, but U.S. Treasury yields did not see the kind of safety bid that many were expecting and has been typical in times of stock-market stress in the past.
Strategists link the lack of a move to bonds to a number of events: Hawkish rhetoric from Fed officials even as the equity market stumbled; a bout of selling by hedge funds that had expected a rally in the bond market that they didn't get; and bond sales by central banks in China and other emerging market economies trying to protect their currencies from depreciating.
Reduced appetite from overseas, along with the outlook for the Fed, will be crucial in coming weeks if equities fall again and bonds don't respond. The Fed decision on September 17 could mark the first rate increase in almost a decade, and uncertainty surrounding that decision is likely to keep many in the bond market on the sidelines.
"The correlation between bonds and stocks is more situational now because it's the central banks calling the shots," said Robert Vanden Assem, head of developed markets investment grade fixed-income at PineBridge Investments in New York.
During the recent U.S. stock market sell-off in the third week of August, for instance, the S&P 500 .SPX dropped 9 percent, but U.S. 10-year Treasury yields, which move inversely to prices, fell by only 12 basis points.
That's not typical. According to Bank of America Merrill Lynch, the relationship between stocks and bonds that has held since 2009 suggests 10-year yields should have declined by 22 basis points.
Bond yields since then have drifted higher and buying interest has been minimal. The lack of a rally in the U.S. Treasury market made big losers out of notable hedge funds, including Bridgewater Associates' All-Weather Fund, which fell 4.2 percent in August.
These funds borrowed heavily to augment their returns, but as things became turbulent, that leverage generated losses that forced them to wind down that borrowing.
Strategists say part of what kept Treasury yields from reflexively falling through a run to safe-haven debt were hawkish signals from the Fed, particularly Fed Vice Chair Stanley Fischer.
At last week's central bank gathering in Jackson Hole, Wyoming, several Fed officials, including Fischer, seemed to boost the odds on a rate increase if not in September, then certainly in December. The message the Fed delivered over the weekend came between a Friday and Monday that saw the U.S. Standard & Poor's 500 lose 7 percent of its value.
Leading brokerages, including Citigroup and Bank of America, commented that though it's a close call, the odds favor an increase in the next few weeks.
"Unless the U.S. economy shows signs of slowing, the bond market is likely to keep yields relatively firm," said Alan Gayle, director of asset allocation at RidgeWorth Investments, even if the S&P 500 falls in the weeks ahead on concern about growth in China and other emerging market economies, he said.
Interest rate futures this week saw a more than 50 percent chance of a rate hike in December FFZ5 and a 28 percent probability in September FFU5, according to CME Group's FedWatch program.
If that happens, bonds won’t look as attractive. Higher interest rates diminish the value of an investor's bond holdings, resulting in lower portfolio returns.
"Treasuries have been a good diversifier to portfolios, but their benefit as a diversifier has been reduced because yields are already extremely low and the Fed is starting to normalize rates," said Rick Rieder, chief investment officer of fundamental fixed income at BlackRock in New York.
CHINA, CURRENCY INTERVENTIONS
Further supporting yields on U.S. Treasuries was the sell-off in reserves by China and other emerging market economies to shore up their slumping economies. U.S. Treasuries represent the bulk of the Chinese and emerging market reserves.
Fears over weakened growth prospects and plunging commodity prices in some emerging markets have taken a toll on their currencies. As China sold currency reserves in recent months, real yields have moved higher since the beginning of the year, while inflation expectations have declined.
China and emerging markets led the build-up in global foreign exchange reserves following the 1997 Asian crisis to a peak of $12 trillion last year. This cash pile shielded them from the 2007-08 crisis, and it looks as if it is once again being deployed.
It's not clear whether China has sold U.S. Treasuries over the last month, or if so, how much. Bank of America Merrill Lynch speculated in a research note that if China sold between $7 billion to $10 billion a day of U.S. Treasuries in the three weeks since the Chinese yuan devaluation on Aug. 11, it might have dumped as much as $150 billion in U.S. government bonds.
These are large numbers given the fact that the total net issuance of Treasuries this year will only be about $500 billion, said Bank of America Merrill Lynch in its research note. As of June 2015, China held $1.27 trillion in U.S. Treasury securities, according to capital flows data from the U.S. Treasury Department.
"The presence of central banks within our markets is over-riding and it's all-encompassing and has driven the activity since 2008," said PineBridge's Vanden Assem.
Pure propaganda "Greece is going to be fine!" Is it now...