Sentiment Muted Ahead Of Payrolls Report

While everyone's attention this morning will be focused on the sheer, seasonally-adjusted noise that is the monthly NFP report (keep in mind that any number +/- 200,000 of the actual, is entirely in the seasonal adjustments and is thus entirely in the eye of the Arima X 13 beholder), which is expected to print at 140,000, resulting in an unemployment rate of 7.6%, there were some events overnight worth noting.

First, the China non-manufacturing PMI printed at 54.5 in April, down from 55.6, and tied with the lowest such print in two years. The biggest red flag was that New Orders dropped below 50, with the price index also declining sharply, indicating that either the Chinese slowdown is for real, and the national bank will have no choice but to ease unleashing inflation, or that the politburo wishes to telegraph to the world that China is slowing, because what goes on in China, and what data is released out of China are never the same thing.

Elsewhere, in Europe Mario Draghi's henchmen were stuck in damage control mode, and Ewald Nowotny said markets over-interpreted a signal yesterday that the ECB would consider a deposit rate below zero. The 17-member currency yesterday dropped the most in more than two weeks versus the greenback after central bank President Mario Draghi said policy makers have an “open mind” on reducing their so-called deposit rate below zero for the first time. Policy makers have “no plan in this direction,” Nowotny said in an interview with CNBC today. This helped boost the EUR from its languishing levels in the mid 1.30s higher by some 50 pips following his statement.

Also in Europe, today's weekly LTRO repayment announcement (€8MM from LTRO1, €608MM from LTRO2 by total of 1+5 banks) was the smallest since program started. It appears the excess liquidity in the Eurozone financial system is now more or less gone, which as Newedge predicts will put pressures on money market rates. "Yesterday’s refi rates cut might be a useful tool to put a cap on Eonia rates but it might not be enough if markets start to price in lower excess liquidity that would imply a passive tightening in the current policy stance.” According to Newedge's Annalisa Piazza.

Otherwise, notable was the rapid upward move in the price of gold, perhaps catalyzed by the statement by the Indian gold jewelry trade federation which said that the country's jewelers may face a gold shortage on import curbs. If today's NFP number is absolutely abysmal, it likely will send the S&P above 1600, and gold over 1500 unless of course the imminent increase in even more infinite QE, and paper dilution is somehow superspun as beneficial for paper money.

In addition to the largely irrelevant NFP number we will also get just as irrelevant factory orders data as well as non-manufacturing ISM. Sadly, no fundamentals matter any more, period. Thank Bern Bernanke.

The key highlighted bulletized by Bloomberg:

  • The euro-area economy will shrink 0.4% this year, more than previously estimated in 2013 as part of a two-year slump that has pushed up unemployment to a record, the EC said in revised forecasts today; France and seven other economies are expected to contract
  • Spanish 10Y bond yields fell below 4% for first time since 2010 while Italian 2Y yields fell below 1% for the first time
  • China’s service industries expanded at a slower pace last month, adding to the drag on growth in the world’s second-biggest economy after manufacturing lost momentum
  • China has the option of selling to the public some assets from its $3.44t forex reserves, according to an opinion piece in Caixin Century Weekly
  • U.K. services strengthened to an eight-month high of 52.9 in April as new business rose, adding to signs that Britain’s economic recovery may gain momentum
  • The U.K. Independence Party gained seats from Cameron’s Conservatives and its Liberal Democrat coalition partner in England local elections; “This sends a shock wave through the establishment,” UKIP leader Nigel Farage told Sky News
  • Stephen Poloz, former CEO of Export Development Canada, appointed as Bank of Canada governor to replace Mark Carney yesterday; may signal a weaker CAD and lower borrowing costs
  • Sovereign yields mixed, with EU peripherals lower, led by Spain, Ireland and Portugal. Japan closed for holiday; Shanghai Composite +1.5%. European stocks , U.S. stock-index futures gain; WTI crude, gold and copper rise

Some macro perspective from SocGen

G4 central banks are decidedly the be-all and end-all for currencies this year, but for a moment today the focus will switch back to the US economy and the latest non-farm payrolls report. Nowotny's suggestion this morning that the negative deposit rate signal was ‘over interpreted' has caused the EUR to squeeze higher, but upside should be capped nevertheless unless we see a surprise increase today in the US unemployment rate from 7.6%.

In cutting its key repo rate, the ECB recognised yesterday its concern regarding the economic outlook for the eurozone, including the worsening backdrop in the core countries. The ECB's monetary policy is, and will remain, accommodative for long. The forward guidance was underlined by Nowotny who said the ECB will keep rates low for a ‘longer period'. In addition to immediate action on interest rates, the central bank is considering measures to help resolve a fragmented credit landscape, i.e. easing financing conditions for SMEs and reviving the ABS market. This will encourage risk takers and higher beta currencies: the ZAR, MXN and NOK outperformed (vs the USD) yesterday, while the SEK, EUR and CHF underperformed. The currencies with the highest yields and smallest exposure to the economic performance of the eurozone offer the highest potential gains short term. On the forex markets, the ECB's ultra-accommodative policy and the prospect of a negative deposit rate have weighed on short rates. Traders look for a lower fixing in euribors this morning by 1-2bp.

In the US, yesterday's lower initial claims data may have got hopes up of a solid employment report but the claims numbers fell out of the payrolls survey week so will not have an impact until next month. Ben Bernanke clearly stated at the FOMC that the next decision (i.e. whether or nor QE3 is pursued) will be data-dependant. The US unemployment rate is still too high for the Fed Chairman and so until further notice we look for the current $85bn/month purchase programme to carry on. Following disappointing job creation last month, the consensus is expecting a pick-up (of about 140K) and a stable unemployment rate (at 7.6%). These figures will not have a major impact on the rate or forex markets. However, we will be watching the UST 10Y, which fell below key support level of 1.64%. A disappointing report could prompt it to break below 1.60%, and thus weigh on the dollar.

And the full recap from DB's Jim Reid

In terms of markets, fears that the ECB would fumble in the Great Global Central Bank pass the liquidity parcel game were eased yesterday as Draghi kept his options open more than he perhaps might have been expected to do. There have been times in the last year where he has suggested that the ECB has done pretty much all it can do but perhaps he's learnt from the OMT program that bazookas can work at the right time. One would have to say that the consequences of negative deposit rates would have to be thought through pretty carefully but in not ruling them out he subtly signalled a further easing bias. This was reflected in the Euro which went from 1.3135 to an intraday low of 1.3037 after these remarks and then settled modestly above these lower levels.

Across markets, Credit was the standout performer with CDS spreads aggressively tighter on the day. The European Crossover, Main, Financial Senior and Sub were -21bp, -6bp, -7bp and -11bp tighter. Italian and Spanish bond spreads narrowed 8bp and 4bp against Bunds respectively with the latter reaching its tightest level since August 2011. In the US, the CDX IG was 3 ¾bp tighter to close at around 74bps. The last time the index was this tight was as far back as December 2007. Clearly it is not directly comparable given the many contract rolls and the composition changes in between (indeed the S9 back then even included names such as Countrywide and MBIA!), but optically spread levels have now unwound the impact of numerous bouts of European peripheral panic, fears of a Eurozone breakup, a Greek and Lehman default, several TBTF episodes (AIG, Fannie/Freddie, Bear), and a UK bank run. Whilst it feels like markets have moved from bust to boom with very little economic recovery in between, US equities are already long past that point with the S&P 500 making another all time high yesterday. The index rose +0.94% yesterday although that didn’t seem to trigger any selling in Govies which saw the 10-year T-yield close virtually unchanged at 1.63%. When both are in demand, it perhaps shows how prevalent liquidity is, and the perception that it will stay.

Asian equities are mostly in positive territory overnight. The KOSPI, Hang Seng and the Shanghai Composite are +0.3%, +0.6% and +1.8%, respectively. Asian credit is also rallying tighter, supported by the Philippines’ newly minted IG status (by S&P) and a strong secondary performance in CNOOC’s new $4bn deal. Asian benchmark names are also tighter across the board which perhaps sets the market up for another busy week of new issues next week. The Australia iTraxx is 5bp tighter as we type. China’s non-manufacturing PMI reading for April was broadly in line with expectations (50.4 v 50.5).

In reality there was some positive US data flow which perhaps encouraged the rally. The latest initial jobless claims fell more than expected (324k v 345k) to hit its lowest since January 2008. A smaller-than-expected trade deficit (-$38.8bn vs - $42.3bn) was also helpful. The final April PMI print in Europe was mixed but was overshadowed by the ECB meeting and Draghi’s media event. In other European news, Bloomberg noted that France and Spain were among a large group of EU countries that opposed a proposal to bring forward bail-in rules to 2015 from 2018 on concerns that the accelerated timetable wouldn’t leave banks with enough time to prepare.

Moving on to today, Payrolls will clearly be the main event ahead. Markets are looking for a 140k/150k headline/private payroll increase in April. The unemployment rate is expected to remain unchanged at 7.6%. These are in line with Joe LaVorgna’s forecasts but he is worried that this could still be too high given Wednesday’s weak ADP report. He thinks that if we get another sub-100k reading on NFP market chatter around the need for QE expansion will grow louder. So will the market rally or sell-off on a weak number? Payrolls aside we will also get factory orders and the non-manufacturing ISM.