Futures Slump Ahead Of Nonfarm Payrolls As ECB QE Euphoria Fades

It has been an odd session: after yesterday's unexpected late day swoon despite the ECB launch of "Private QE", late night trading saw a major reversal in USDJPY trading which soared relentlessly until it rose to fresh 6 year highs, briefly printing at 105.70, a level not seen since October 2008, before giving back all gains in overnight trading. It is unclear if it was this drop, or some capital reallocation from the US into Europe, but for whatever reason while Europe has seen a stable - if fading in recent hours - risk bid, and European bonds once again rising and Irish and Italian yields both dropping to record low yield, US equity futures have slumped and are now trading at the lows of the session ahead of a US nonfarm payroll print which is expected to rise and print for the 7th consecutive time above 200K, at 230K to be precise, up from 209K in July (down from 288K in June). It is unclear if the market is in a good news is bad news mood today, but for now the algos are not taking any chances and have exited risky positions, with the ES at the low end of the range the market has been trading in for the past week centered aroun S&P 2000.

In any event, if the equity bid does not recover soon, the ECB's intervention may be the weakest, or most priced in for, central bank intervention in New Normal history.

On the geopolitical front, there are just two thing to keep track of:

  • PRO-RUSSIAN REBELS SAY THEY HAVE ENTERED THE CITY OF MARIUPOL IN UKRAINE - RUSSIA'S INTERFAX QUOTES SOURCE AMONG DONETSK SEPARATISTS

and

  • UKRAINE REBEL LEADERS ARRIVE FOR PEACE TALKS IN MINSK

So more of the same: peace talks even as the separatists have made their biggest territorial gains since the early summer. Watch the resolution of this carefully as it will likely take place just after NFP when most traders will be on their way out.

Another notable development overnight took place in Japan which announced it is preparing a backup plan for fiscal stimulus. It appears that the BOJ is now fully resolved to not to more QE, which may be what is weighing on the USDJPY.

Asian equities have taken the US lead overnight with most indices (except China) preparing to end a decent week on a softer note. The Nikkei, Hang Seng and the KOSPI are down -0.1%, -0.2% and -0.4%, respectively. The Shanghai Composite is +0.3% as we type as it heading towards its biggest weekly gain in a year. M&A events in China along with growing optimism around the upcoming HK-Shanghai stock connect. Chinese government’s state run news agency has also been actively publishing articles in the past week advocating equity investments. In credit, the iTraxx Aus, Asia and Japan indices are around 1bp tighter. New issues will be the main focus for Asian credit in coming weeks as the pipeline continues to grow. Most Asian stocks fall, Chinese shares outperform while Japanese stocks fall. MSCI Asia Pacific down 0.4% to 148.2. Nikkei 225 down 0%, Hang Seng down 0.2%, Kospi down 0.3%, Shanghai Composite up 0.8%, ASX down 0.6%, Sensex down 0.1%. All 10 sectors fall, led by healthcare

European stocks fall from a 2-month high. German shares outperform as the country’s industrial production rose more than estimated in July. U.S. futures drop.
The euro is heading towards its eighth consecutive weekly decline. The DAX has extended yesterday’s gains, now sitting at early July highs as the ECB’s easing measures and lifted by Daimler and Volkswagen shares. Traders look ahead to the expected signing of ceasefire agreement between the leaders of Ukraine and the pro-Russian separatists. Such an agreement could allow current Russian sanctions to be loosened in the near future, with leaders still discussing the measures at today's NATO meeting. The FTSE-100 is the morning’s underperformer, with UK miners ebbing lower on poor iron ore prices, which struck fresh 5yr lows overnight.

The main thing on today's docket is the US nonfarm payrolls and the now largely irrelevant unemployment rate: much more attention will be paid to hourly and weekly wages.

Market Wrap

  • S&P 500 futures down 0.3% to 1991.75
  • Stoxx 600 down 0.2% to 348
  • US 10Yr yield at 2.457%
  • German 10Yr yield down 2bps to 0.95%
  • MSCI Asia Pacific down 0.4% to 148.2
  • Gold spot up 0.2% to $1266.5/oz

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities sit just below yesterday’s highs as traders sit on the side-lines ahead of today’s BLS jobs report
  • Today’s Change in Nonfarm Payrolls expected to top 200K for the seventh consecutive month, keeping the Fed on track to conclude QE by October
  • Eastern Ukraine hangs in the balance as pro-Russian separatist leaders meet Ukrainian President Poroshenko to officially sign a ceasefire
  • Treasuries steady before report forecast to show U.S. economy added 230k jobs in August while unemployment rate held at 6.1%.
  • Ukrainian President Petro Poroshenko voiced “careful optimism” that talks today with pro-Russian separatists in Belarus will set the course for a cease-fire after more than five months of deadly fighting
  • Draghi’s plans to buy ABS are being greeted with skepticism by investors who have seen the EU1.2t market contract more than 40% as regulators cracked down on the debt blamed for deepening the financial crisis
  • Four years after being bailed out by its EU partners, Ireland joined nations from Germany to Austria and Finland as its 2Y note yield dropped below zero for the first time
  • New regulation meant to ensure banks have enough easy-to-sell assets to survive a crisis is creating doubt over whether $1.1t of mortgage debt qualifies, potentially hurting demand in a key cog of the U.S. home-finance system
  • German industrial output grew 1.9% in July, more than forecast; euro-area 2Q GDP was unchanged from 1Q on a slump in investment, confirming Eurostat’s Aug. 14 estimate
  • The Abe administration gave its clearest signal yet of concern about damage to the Japanese economy from this year’s sales-tax increase, with the finance minister saying that a back-up plan for stimulus will be prepared
  • The HealthCare.gov website that had an error-plagued debut last year was hacked in July, although no personal data appear to have been taken, according to the U.S. Centers for Medicare and Medicaid Services
  • Sovereign yields mostly lower. Asian and European stocks  mostly lower, U.S. stock-index futures decline. WTI crude, gold and copper higher

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 230k (prior 209k)
    • Change in Private Payrolls, Aug., est. 215k (prior 198k)
    • Change in Manufacturing Payrolls, Aug., est. 18k (prior 28k)
    • Unemployment Rate, Aug., est. 6.1% (prior 6.2%)
    • Underemployment Rate, Aug. (prior 12.2%)
    • Average Hourly Earnings m/m, Aug., est. 0.2% (prior 0.0%)
    • Average Hourly Earnings y/y, Aug.m est. 2.0% (prior 2%)
    • Average Weekly Hours All Employees, Aug., est. 34.5 (prior 34.5)
    • Change in Household Employment, Aug., est. 238k (prior 131k)
    • Labor Force Participation Rate, Aug. (prior 62.9%) Central Banks

FIXED INCOME

Bund futures opened relatively flat, shrugging off minor weakness inspired by a strong German Industrial Production figures markets pulled back a small part of yesterday’s sharp losses. Peripheral European debt has seen most of the action, with Irish, Slovakian and Austrian front-end yields joining their French, German, Belgian and Dutch counterparts in negative territory. As such, Italian and Spanish bonds have extended their upside, with 10yr yields folding to all-time lows. The German yield curve trades slightly flatter on the day after yesterday's ECB-inspired steepening is partially reversed on modest Buxl strength.

EQUITIES

The DAX extended yesterday’s gains, now sitting at early July highs as the ECB’s easing measures and lifted by Daimler and Volkswagen shares. Traders look ahead to the expected signing of ceasefire agreement between the leaders of Ukraine and the pro-Russian separatists. Such an agreement could allow current Russian sanctions to be loosened in the near future, with leaders still discussing the measures at today's NATO meeting. The FTSE-100 is the morning’s underperformer, with UK miners ebbing lower on poor iron ore prices, which struck fresh 5yr lows overnight.

FX

USD-index extended on yesterday's sharp rise to print its highest level since July 2013, which saw USD/JPY surge to trade at October 3rd 2008 levels at 105.70. Elsewhere, GBP/USD fell to its lowest level since February 6 while EUR/USD looks set to post its 8th weekly loss, the longest weekly losing streak since 1997. AUD/NZD continues to trade at its November 2013 highs ahead of next week's RBNZ rate decision with the likes of BNZ and HSBC revising their calls for a rate hike to unchanged.

COMMODITIES

Spot gold managed to finish yesterday’s session relatively flat, despite the ECB rate decision providing a brief spell of strength, as the bearish theme of the week persists. The stronger USD this morning has failed to prevent gold from clawing back some of the modest losses seen in the late COMEX trade yesterday as traders look to square bets ahead of today’s Nonfarm Payrolls. WTI and Brent crude futures trade positively, both with gains of USD 0.50/bbl, however oil remains on track for a weekly loss of over USD 1/bbl.

* * *

DB's Jim Reid concludes the overnight recap with his always original views

This afternoon's payrolls have yet again been overshadowed by the ECB who are starting to catch up with the curve that they've been sat firmly behind. We'll discuss the details of the new initiatives below but the encouraging thing for markets from yesterday is that they have seemingly found a bit more momentum in the pace of their deliberations. To get to full public QE it was always going to be a process. We first needed to get through negative deposit rates and then through other asset purchases. In the space of three months we've now progressed a long way and the fact that they admitted to discussing full public QE shows just how far. Its still going to be politically, technically and legally difficult to achieve but we are surely getting closer to when that difficult subject will come to more of a head. For now the ECB will try to increase their balance sheet with the TLTROs and the new ABS purchasing program but its debatable whether they can achieve the €1 trillion incremental increase in their balance sheet which they are targeting in a timely enough manner. The clamber for full QE won't therefore go away and the ECB have arguably given the market encouragement that its now a genuine live discussion point at their meetings.

For now the fall in the Euro may give the ECB a little bit of breathing space. Before the June meeting the Euro stood at around 1.36 vs the Dollar. Its now trading at 1.2934 and has fallen from a high of 1.3154 in the last 24 hours. Indeed by targeting a level for its balance sheet, the ECB is implicitly telling the market that it wants the EUR to depreciate further. Taking a brief look at some of the details of yesterday’s package, the 10bps cut to their main policy rate brings its refinancing rate and deposit rate down to 0.05% and -0.20%, respectively, This also clears up the prevailing ambiguity of whether rates had reached their lower bound after the ECB had previously declared that we had hit the bottom in rates. In terms of the scope of the private QE, it now includes ABS and covered bonds and purchases will begin in October. Whilst the exact modalities are still being firmed up (only be released after the press conference next month) we learnt a few things from yesterday’s event. First, any non-financial private sector asset will be eligible as long as it is simple and transparent (this includes credit cards and auto loans ABS and RMBS is not ruled out). Second, mezzanine tranches of ABS will also be considered if they are guaranteed which our European economists have previously argued would be the most effective way to offer capital relief for banks. That said the challenge here is existing outstanding stock of guaranteed mezzanines is still very small. Third, we can also expect ECB to participate in ABS purchases in the primary market as well as in the secondary.

European risk assets reacted favourably to these measures which suggest Draghi perhaps delivered more than what was anticipated. The Stoxx600 (+1.14%) gained for the second consecutive day and is now less than a point away from making its YTD highs. The rally was pretty broad based across most sectors (expect oil and gas) but was really led by Financials (+1.39%). This was also echoed by Credit markets with European peripheral banks paper anywhere between 3-10bp tighter on the day. In the world of CDS its also worth noting that the iTraxx Financial Senior index briefly went through iTraxx Main during intraday trading yesterday for the first time in many years. The last time Fin Snr closed inside Main was in January 2010. As we've long been saying we think Fin Senior will trade through Main before YE. Staying on spread products, Italian and Spanish 10yr government bonds also narrowed 12-13bps against Bunds to close at a spread of 138bp and 119bp, respectively. Spanish 10yr bonds have not traded this tight to Bunds since May 2010.

Staying on Credit but switching tracks to US HY we note that EPFR weekly fund flows for the asset class turned negative for the first time in 3 weeks. For the week ended 3 September, US HY funds saw outflows of $175m which compares with the inflows of US$165m in the week prior and inflows of US$2.66bn in the week prior to that. US HY bond prices are down by roughly 0.4% over this past week although we are a little bit hesitant to read too much into this given a Labour Day shortened week in the US. Nevertheless flows over the last couple of week have been a little disappointing given the improving macro sentiment.

Moving away from US HY, yesterday saw the S&P 500 (-0.15%) end lower for the third consecutive day. Interestingly the strength in the Dollar continues to add pressure on oil prices which sets the scene for another weak day for WTI crude (+1.14%). US Energy stocks were a main laggard which likely weighed on the broader market. Treasuries have gotten off to a weak start in September with the 10yr backing another 5bps higher yesterday. The 10yr yield is broadly steady at around 2.45% overnight in Asia but we are about 11bps higher from where we ended in August. There was some hawkish Fed speak from the new Cleveland Fed President Loretta Mester yesterday and overall data continues to remain fairly encouraging for the economic bulls which didn’t help the moves in rates.

Asian equities have taken the US lead overnight with most indices (except China) preparing to end a decent week on a softer note. The Nikkei, Hang Seng and the KOSPI are down -0.1%, -0.2% and -0.4%, respectively. The Shanghai Composite is +0.3% as we type as it heading towards its biggest weekly gain in a year. M&A events in China along with growing optimism around the upcoming HK-Shanghai stock connect. Chinese government’s state run news agency has also been actively publishing articles in the past week advocating equity investments. In credit, the iTraxx Aus, Asia and Japan indices are around 1bp tighter. New issues will be the main focus for Asian credit in coming weeks as the pipeline continues to grow.

We should also get more headlines on Ukraine/Russia over the weekend on the back of the peace talks that was scheduled for today. Speaking at the conclusion of the two-day NATO meeting yesterday, Secretary General Anders Fogh Rasmussen expressed his scepticism around the cease fire talks today as previously these had proved to be "smokescreens for continued destabilisation of Ukraine". We should also learn more about the pending decision on the additional EU sanctions over the next 24 hours. Looking at the day ahead, Payrolls will clearly be the main data to watch. The market is expecting a 230k and 215k print for the headline and private payrolls in August. This compares with 209k and 198k in July, respectively. The unemployment rate is expected to inch down by 0.1ppt to 6.1%. Joe LaVorgna is below market for today’s report expecting a headline and private payroll print of 200k and 195k, respectively.