Today’s nonfarm payrolls release is expected to show a "spring" renaissance of labor market activity that was weighed on by "adverse weather" during the winter months (Exp. 200K, range low 150K - high 275K, Prev. 175K). Markets have been fairly lackluster overnight ahead of non-farm payrolls with volumes generally on the low side. The USD and USTs are fairly steady and there are some subdued moves the Nikkei (-0.1%) and HSCEI (+0.1%). S&P500 futures are up modestly, just over 0.1%, courtesy of the traditional overnight, low volume levitation. In China, the banking regulator is reported to have issued a guideline in March to commercial banks, requiring them to better manage outstanding non-performing loans this year. Peripheral EU bonds continued to benefit from dovish ECB threats at the expense of core EU paper, with Bunds under pressure since the open, while stocks in Europe advanced on prospect of more easing (Eurostoxx 50 +0.14%). And in a confirmation how broken centrally-planned markets are, Italian 2 Year bonds high a record low yield, while Spanish 5 Year bonds yield dropped below US for the first time since 2007... or the last time the credit risk was priced to perfection.
As to how one should trade today's payroll number, if it is a miss one should buy, while a beat suggests one should really buy. After all that's what the algos will be doing in the milliseconds just before the NFP print is leaked to HFT data subscribers. And the algos are never wrong.
The prospect of European QE has overshadowed today's payrolls a touch. There are hopes that NFP will experience a strong bounce-back after the winter stresses. In the 12 readings before last December, NFP gains averaged +205k. In the past 3 it’s averaged +129k, a 3m average level last seen in the summer of 2012. So either the economy is truly underperforming or there is some real payback to come on the payroll numbers. Yesterday’s ISM was partially supportive of the payback theory (see above). Also supportive was Wednesday’s +191k ADP number (vs +139k in Feb and subsequently revised up to +178k). DB’s Joe LaVorgna is expecting a NFP reading of +275k today which would reflect roughly a +100k payback from the past months weather-related weakness. He expects the unemployment rate to drop to 6.5% from February’s 6.7% reading. Joe is out in front of market consensus, which is expecting a +200k NFP figure and a 6.6% unemployment rate.
The only thing of note on today's calendar is the NFP, which as already pointed out better bounce by a lot or else two months of weather related justifications by climate apologists will go right out of the window into balmy spring weather.
Bulletin headline summary from Bloomberg and RanSquawk
- Treasuries steady, 5Y yields near highest YTD, 10Y highest since Jan., before report forecast to show U.S. economy added 200k jobs in March while unemployment rate held at 6.6%.
- Yields on Spanish 5Y notes fell below those of their U.S. equivalents today for the first time since 2007, the latest milestone in this year’s rally among the bonds of Europe’s most indebted nations
- As ECB officials try to stamp out the risk of deflation, Draghi yesterday gave his strongest signal so far that the ECB is prepared to embrace a policy that has become a byword for large-scale government bond purchases
- German factory orders rose 0.6% in Feb., above median 0.2% estimate in a Bloomberg survey; January orders were revised lower to 0.1% from 1.2%
- NATO accused Russia of spreading “propaganda” about its reach in Europe as Obama signed legislation imposing sanctions on Russians for the incursion in Crimea and economic aid for Ukraine
- China’s benchmark money-market rate posted the biggest weekly decline this year as demand for cash eased after banks met quarter-end capital requirements
- Sovereign yields mixed. Asian stocks mixed, Nikkei little changed, Shanghai +0.7%. European equity markets mostly higher, U.S. stocks futures rise. WTI crude, copper and gold gain
US Event Calendar
8:30am: Change in Nonfarm Payrolls, March, est. 200k (prior 175k)
- Change in Private Payrolls, March, est. 200k (prior 162k)
- Change in Manufacturing Payrolls, March., est. 7k (prior 6k)
- Unemployment Rate, March., est. 6.6% (prior 6.7%)
- Average Hourly Earnings m/m, March, est. 0.2% (prior 0.4%)
- Average Hourly Earnings y/y, March, est. 2.3% (prior 2.2%)
- Average Weekly Hours All Employees, March., est. 34.4 (prior 34.2)
- Change in Household Employment, March (prior 42)
- Underemployment Rate, March (prior 12.6%)
- Labor Force Participation Rate, March (prior 63%)
EU & UK Headlines
Core EU bonds underperformed today, with longer-dated German paper under particular selling pressure, while peripheral bond yield spreads (Spanish 5y yield below US 5y equivalent for the first time since 2007) continued to tighten as market participants speculated of more accommodative policies from the ECB following the press conference yesterday. Analysts’ take on the ECB:
- UBS see ECB QE targeting bank lending as opposed to bond purchases, noting the fact that SMP non-sterilization was discussed suggests the ECB are already comfortable with the process.
- Goldman Sachs this morning posted a trade recommendation, suggesting a short Bund position as ECB policy favours credit over government debt, now no longer expects ECB policy rate cuts adding that they do not expect any unconventional measures from the ECB.
The sentiment for riskier assets was also supported by the release of the latest Eurozone's PMIs, with Italian, French and Eurozone better than previous but Germany's lower than expected. In other news, eKathimerini reported that the Greek sovereign rating is expected to be upgraded at Moody's after-market today. Greece are currently rated Caa3; Outlook stable at Moody's.
US Headlines
USTs traded steady this morning ahead of the monthly jobs report release by the BLS, though the under performance by Bunds saw 10y US/GE spread widen to June 2006 levels. Of note, Fed's Fisher (Voter, Hawk) said the current taper path will conclude QE in October this year, however stopped of specifying a time for the first rate hike after being critical of calendar-based guidance.
Equities
Stocks in Europe are seen broadly higher, benefiting from the growing expectation that the ECB will introduce QE type program following yesterday's dovish press conference. The risk on sentiment meant that the more defensive sectors such as health-care underperformed, while oil & gas led the move higher, benefiting from higher energy prices.
Commodities
WTI crude futures traded in positive territory, breaking above USD 101 level in the process, as the latest developments in the Libyan situation, which had weighed on prices and resulted in Brent under performing, is seen by energy markets to offer no quick increase in supply. In other news, US Defence Secretary Hagel said the US may add brigade in Europe to counter Russia and added that a permanent 3rd brigade was among its options. Of note, the CME lowered WTI crude oil margins by 6.5% to USD 2,900 from USD 3,100 per contract.
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The overnight recap concludes with the comments by DB's Jim Reid
If A equals no QE and Z equals full on QE, the ECB moved to about M yesterday. One of the main points that came out of the press conference was that European QE is very much on the table. We've always felt they would eventually have to do it but lately we've been getting a bit nervous of this. Whilst the ECB left itself a lot of room to manoeuvre on what conditions might cause QE to be introduced and in what form it might take, the “theological taboo” (as our European Economists refer to it) of QE has seemingly been breached. The Governing Council is now, “unanimous in its commitment to using also unconventional instruments within its mandate to cope effectively with risks of a too prolonged period of low inflation”. Whilst no hard thresholds on when any QE programme might begin were given, our Economists interpretation of Draghi’s comments is that the decision to launch any programme would depend on a small number of indicators (inflation and exchange rate developments, a factor which has gained increasing prominence in ECB communications of late) and that a few months worth of data would be enough to pull the trigger. The big unknown remains what kind of instruments the ECB would use in any action. So it seems that after a damp start to 2014 the ECB appears to be stepping up its rhetoric and yesterday the chances of European QE in 2014 significantly improved.
On a slightly lighter note when Draghi was asked about IMF Christine Lagarde’s earlier comments on the ECB’s needing to take further action (which we wrote about yesterday) he responded with a rather humorous, "The IMF has been of recent extremely generous in its suggestions on what we should do or not do, and we are really thankful for that. But the viewpoints of the Governing Council are in a sense different … And frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before an FOMC meeting would take place." So a little tension here.
The market reaction to Draghi’s comments saw credit and equities strengthen while core and periphery bond yields fell. Euro-dollar traded down 0.34%, but the reaction was relatively muted, and it only managed to trade with a 1.36 handle for a matter of seconds (1.3698 marked the lows yesterday). From the lows, the Stoxx600 rallied 0.72% as Draghi spoke, after a bit of initial disappointment following the release of the ECB statement. Peripheral Europe, especially Spain and Italy, led gains in European bond markets. Italian and Spanish bond yields are both now firmly at multi-year lows. In credit, the European Crossover and Main index rallied 7bp and 2.5bp from the wides respectively. The UST treasury curve closed firmer for the first time in three days, with some spill over buying from Europe.
Markets have been fairly lacklustre overnight ahead of non-farm payrolls with volumes generally on the low side. The USD and USTs are fairly steady and there are some subdued moves the Nikkei (-0.1%) and HSCEI (+0.1%). S&P500 futures are up 0.11%. In China, the banking regulator is reported to have issued a guideline in March to commercial banks, requiring them to better manage outstanding non-performing loans this year (Shanghai Securities News).
The S&P 500 (-0.11%) hit intra-day records shortly after the open but sentiment waned as the day wore on as markets went into wait-and-see mode prior to payrolls, before closing with a small loss. Yesterday’s trading had a somewhat defensive tone to it with lower-beta utilities (+0.3%) and telcos (+0.68%) outperforming. The US ISM non-manufacturing revealed a similar theme to the ISM manufacturing and the ADP earlier in the week - coming short of analyst expectations but showing improvement on February’s numbers. The headline ISM non-manufacturing for March rose +1.5 points to 53.1 (slight below the 53.5 expected) but both new orders (53.4 vs. 51.3) and employment (53.6 vs. 47.5) components of the index rebounded. In other details of the survey, the retail trade sector said that “Business was a little slower than expected due to harsh weather conditions across much of the country, but we expect a rebound as spring approaches”. This was echoed by the recreation sector which said that “Cold weather played more havoc on revenue, causing steep declines for nearly a week, and then picked up well beyond expectations. Overall, per capita spending increases, but frequency of visits are down; net neutral to slightly positive”. US Initial jobless claims for the week of March 29 rose +16k (exp +8k) after the prior week was revised down -1k to 310k. The US trade balance for February widened slightly to -$42.3bn from -$39.3bn in January, driven primarily by services (-$0.7bn), non-petroleum goods (-$0.7bn) and petroleum products (-$0.6bn). Overall, exports slipped -1.1% in the month. In light of the ongoing string of weaker economic figures in Q1, which DB’s US economists attribute mainly to inclement weather, DB are lowering their Q1 GDP forecast from 3.1% to 2.0%.
The prospect of European QE has overshadowed today's payrolls a touch. There are hopes that NFP will experience a strong bounce-back after the winter stresses. In the 12 readings before last December, NFP gains averaged +205k. In the past 3 it’s averaged +129k, a 3m average level last seen in the summer of 2012. So either the economy is truly underperforming or there is some real payback to come on the payroll numbers. Yesterday’s ISM was partially supportive of the payback theory (see above). Also supportive was Wednesday’s +191k ADP number (vs +139k in Feb and subsequently revised up to +178k). DB’s Joe LaVorgna is expecting a NFP reading of +275k today which would reflect roughly a +100k payback from the past months weather-related weakness. He expects the unemployment rate to drop to 6.5% from February’s 6.7% reading. Joe is out in front of market consensus, which is expecting a +200k NFP figure and a 6.6% unemployment rate.
Outside of the ECB its been fairly quiet 24 hours in terms of news. The Fed announced yesterday that board member Jeremy Stein will resign effective 28th May 2014, in order to return to his teaching position at Harvard’s department of economics. As a policymaker, Stein was considered moderate to hawkish, so his departure does leave the Fed slightly more dovish. He was most well known recently for his views on financial stability risks during periods of prolonged low rates, including his speech in February 2013 where he warned of over-heating in credit markets.
Turning to the day ahead, today will be almost all about payrolls. Ahead of that we have the latest German factory orders (consensus +6.8% YoY) and we also get the Markit Euroarea retail PMIs. However today will be largely dictated by NFP, due at 1:30pm London.