Market In Holding Pattern Ahead Of Jobs Data

Another day where the taken for granted overnight futures levitation is missing (despite a rather rampy USDJPY), indicates that algos are likely waiting for guidance from today's NFP data (buy if beat, buy more if miss) before committing monopoly money. The consensus for today's NFP is 218K, (up from 192K), although as Goldman notes the whisper number is as high as 240K. As DB says, "the honest truth is that markets are in one giant holding pattern at the moment with volatility and conviction low." One evidence of this is the AAII weekly sentiment indicator which shows the % bullish, bearish or neutral on the US stock market for the next six months. This week the neutral indicator (40.78) is at its highest level for 9 years. No wonder volumes and volatility are low if investors are lacking a directional bias. Yesterday’s reaction to the ISM manufacturing was interesting. Though the headline number came in firmer than expected (54.9 vs 54.3 expected) and more than 1pt higher than last month’s reading of 53.7, the UST and equity reaction suggested that the data had actually surprised to the downside.

In Europe muted price action observed across various asset classes today as market participants come back from May Day holiday and wait for US algos to take charge. In terms of macroeconomic releases, this morning’s release of lower than expected UK Construction PMI failed to result in a meaningful uptick by Gilts, which were weighed on by the unwind of Thursday’s pricing of Wellcome Trust's GBP 400mln 45-year deal. Limited reaction to EU based PMIs (Italian Manufacturing PMI 54.0 vs. Exp. 52.9, French Manufacturing PMI 51.2 vs. Exp. 50.9, German Manufacturing PMI 54.1 vs. Exp. 54.2 and Eurozone Manufacturing PMI 53.4 vs. Exp. 53.3).

Looking at how Asia is trading this morning, the tone has been generally cautious, with volumes lower across the regions as many participants remain out of the office due to the May Day holidays yesterday, and looming golden week holidays in Japan. The Nikkei (-0.4%), KOSPI (-0.1%) are both lower, as is copper futures (-0.1%). Policy easing appears to be a more remote possibility in both China and Japan based on the latest comments from both country’s state leaders. In an article published late yesterday, Chinese Premier Li again voiced his opposition to short term stimulus policies to boost growth, instead preferring to pursue deeper economic reforms (South China Morning Post). In Japan, Prime Minister Abe said that the recent sales tax hike hasn’t hurt consumption as much as feared (Reuters), perhaps lessening hopes of incremental BoJ easing in the short term. A number of Japanese chain stores said that the sales drop was smaller in April than the one that followed the sales tax hike in 1997 (Japan Times). More than 80% of the Japan's key retailers believe that the drop in demand following the April 1st tax hike will fade away by June, according to a Nikkei survey. More than seven out of 10 respondents said sales for April met or beat expectations (Nikkei).

Bulletin headline summary from Bloomberg and RanSquawk

Muted price action and light volumes observed in Europe this morning across various asset classes, with stocks seen mixed (Eurostoxx 50, -0.22%), as market participants await the release of the latest jobs report by the BLS.
GBP underperformed after UK Construction PMI data failed to meet expectations and AstraZeneca's board rejected Pfizer’s revised bid.
Treasuries decline, yields 5Y and longer higher by ~1bps before report forecast to show U.S.
economy added 218k jobs in April while unemployment rate declined to 6.6% from 6.7%.
Consensus of forecasts revised/made after better than forecast ADP has risen to 225k, RBC’s Adam Cole wrote, signaling downside surprise to have bigger market impact than upside surprise
The Yellen Fed has resigned itself to diminished growth expectations, stressing the importance of preventing expansion from faltering rather than saying growth must accelerate from 2%-2.5% pace it has averaged since the recession ended
Ukraine sent armored vehicles and artillery to retake Slovyansk, a pro-separatist stronghold, defying Putin’s demand to pull back troops with Russia’s army massed across the border
The euro-area unemployment rate held near a record, even as manufacturing grew at the fastest pace in three months, adding to mixed signals about the 18-nation currency bloc’s recovery
Sovereign yields mostly lower. Nikkei -0.2%; Shanghai closed for holiday. European equity markets mixed, U.S. stock futures rise. WTI crude, gold and copper gain

US Event Calendar

8:30am: Change in Nonfarm Payrolls, April, est. 218k (prior 192k)
- Change in Private Payrolls, April, est. 215k (prior 192k)
- Change in Manufacturing Payrolls, April, est. 8k (prior -1k)
- Unemployment Rate, April, est. 6.6% (prior 6.7%)
- Average Hourly Earnings m/m, April, est. 0.2% (prior 0.0%)
- Average Hourly Earnings y/y, April, est. 2.1% (prior 2.1%)
- Average Weekly Hours All Employees, April, est. 34.5 (prior 34.5)
- Change in Household Employment, April, est. 250k (prior 476k)
- Underemployment Rate, April (prior 12.7%)
- Labor Force Participation Rate, April (prior 63.2%)
9:45am: ISM New York, April, est. 54 (prior 52)
10:00am: Factory Orders, March, est. 1.5% (prior 1.6%)

EU & UK Headlines

Muted price action observed across various asset classes today as market participants await the release of the latest jobs report by the BLS. In terms of macroeconomic releases, this morning’s release of lower than expected UK Construction PMI failed to result in a meaningful uptick by Gilts, which were weighed on by the unwind of Thursday’s pricing of Wellcome Trust's GBP 400mln 45-year deal. Limited reaction to EU based PMIs (Italian Manufacturing PMI 54.0 vs. Exp. 52.9, French Manufacturing PMI 51.2 vs. Exp. 50.9, German Manufacturing PMI 54.1 vs. Exp. 54.2 and Eurozone Manufacturing PMI 53.4 vs. Exp. 53.3).

Equities

Heading into the North American open stocks in Europe are seen mixed, as market participants await the release of the latest NFP jobs report by the BLS due later on in the session. In terms of notable stock movers, RBS shares surged in London after the bank posted better than expected operating profit, while also noting that it sees modest increases in NIM for rest of year. Also of note, AstraZeneca board rejected Pfizer’s revised GBP 50.00 per share bid, stating that the offer undervalues the company. Focus will now be on earnings by Chevron due out later today.

Combination of weaker than expected UK Construction PMI data, together with reports that AstraZeneca board has rejected Pfizer’s revised GBP 50.00 per share bid meant that GBP/USD underperformed its peers. At the same time, this enabled EUR/GBP to recover off 0.8200 level and advance towards its 10DMA line.

Commodities

Reports that Libya’s Zueitina Port has received first crude tanker has failed to weigh on price, which instead were largely driven by the renewed fears surrounding the stand-off between Russia and Ukraine. Latest reports indicate that that two Ukrainian army helicopters were shot-down by self-defence forces in Slavyansk, according to sources. This follows the Ukrainian army reportedly beginning a special operation against pro-autonomy activists in the area. Additionally, Ukraine's interim PM said his country was entering its 'most dangerous 10 days' since independence.

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DB's Jim Reid summarizes the balance of overnight news

It’s hard to imagine that we won't see a fairly strong payroll number today but the question is whether we see a strong enough number to suggest that the US economy will soon be on the path most economists expected at the start of 2014. The 3, 6 and 12 month average for payrolls is 178k, 188k and 187k respectively. Interestingly this would suggest that the weather impact on payrolls this year might only be around 10k/month if you think growth this year is the same as last. If you believe growth is structurally higher in 2014 then we probably do need to be averaging north of 200k consistently and we therefore need a catch-up soon. The street is at 215k today with our very own sunnyside-up Joe Lavorgna at 240k. Consensus is expecting the unemployment rate to drop 0.1ppt to 6.6% (DB is at 6.5%) which if correct would equal the postcrisis lows recorded in January 2014. The other thing worth looking out for is the participation rate (63.2% last month) which has been gradually ticking higher since bottoming in October 2013.

We probably are in a period where strong data would be a relief with the caveat that a number above 250k might shake Treasuries enough for risk to be concerned. So 200-250k might be the sweet spot for equities. 150-200k would probably help the grind slightly higher as yields would stay low and base rate hikes pushed out. A number below 150k seems unlikely today but if it occurs would probably start to put chinks in the armour of the bulls. The above is all very back of the envelope as revisions, the unemployment rate, the participation rate, and other one-off issues can all impact the interpretation of the headline. But it gives an idea of what might happen with a clean number.

The honest truth is that markets are in one giant holding pattern at the moment with volatility and conviction low. One evidence of this is the AAII weekly sentiment indicator which shows the % bullish, bearish or neutral on the US stock market for the next six months. This week the neutral indicator (40.78) is at its highest level for 9 years. No wonder volumes and volatility are low if investors are lacking a directional bias. Yesterday’s reaction to the ISM manufacturing was interesting. Though the headline number came in firmer than expected (54.9 vs 54.3 expected) and more than 1pt higher than last month’s reading of 53.7, the UST and equity reaction suggested that the data had actually surprised to the downside.

Indeed S&P500 futures fell 7.5 points and treasury yields rallied by about 5bp in the minutes after the ISM release. Perhaps markets had been conditioned to expect a strong number following the strength of the Chicago PMI, ADP (Wednesday) and consumer spending reports earlier. Or perhaps it was the miss on the ISM Prices Paid index (56.5 vs 59.5 expected) which fell 2.5points MoM, with low inflation remaining a topical issue. The disappointment on yesterday’s construction spending number (0.2% vs 0.5% expected) could have also explained the market wobble. Looking at the ISM report in more detail, the improvement in the headline was driven by employment (54.7 vs. 51.1 prev) and supplier deliveries (55.9 vs. 54.0). Comments from the Institute for Supply Management indicated that some of the improvement in the former may be due to a catch-up from earlier weather-related weakness.

Coming back to the treasury market, yesterday’s post-ISM rally brought 10yr yields below the 2.60% mark for a brief period yesterday. It eventually finished the day back above this level, but we're still firmly at the bottom of the last few months’ trading range. US 30yr yields fell to their lowest in around 10 months, and the 2s/30s curve flattened to its lowest level since June last year. In equities, the S&P500 (-0.01%) closed virtually unchanged with gains in the telco sector (largely M&A driven), offset by weakness in oil & gas following disappointing earnings announcement. Many EM markets were closed, but the announcement of the IMF loan for Ukraine did little to help Ukrainian bond yields which rose significantly. Overnight, there have been reports that Ukrainian military forces have launched a large scale operation in the town of Slaviansk (which lies between Kharkiv and Luhansk) to retake separatist-held areas (RT.com, Reuters). There have been reports of casualties on both sides. Outside of the macro data, M&A still is a key driving force for equities and the deal flow continued yesterday with news such as Pfizer planning to raise its bid for AstraZeneca and Bayer said to be talks with Merck to buy its consumer health unit. The final numbers for April showed that it was the busiest month for M&A in terms of volume since at least mid-2007 according to Bloomberg data. Despite the trend, the average premium paid by acquirers remains in line with historical averages (19-20%) suggesting at least there is some restraint being shown by corporate management. Whether it makes sense to be acquiring companies at near record stock prices is another matter.

Turning to the day ahead, the final Euroarea PMIs will be released this morning together with the first readings for the periphery. The US payroll numbers are due 1:30pm London time which will be followed by US factors orders (consensus +1.5% MoM). China’s official services PMI will be released on Saturday.