Futures Flat Following Friday's Jobs Fiasco: All Eyes On Yellen Again

Every ugly jobs report has a silver lining, and sure enough following Friday's disastrous jobs report, global mining and energy companies rallied alongside commodities after the jobs data crushed speculation the Fed would raise interest rates this month.  “The disappointing U.S. jobs report on Friday means that a summer Fed rate hike is off the table,” said Jens Pedersen, a commodities analyst at Danske Bank. “That has reversed the upwards trend in the dollar, supporting commodities on a broader basis. The market will look for confirmation in Yellen’s speech later today.” While commodities benefited from USD weakness, the pound slumped following polls that showed Britons favor exiting the European Union. European stocks and U.S. stock index futures are little changed. Asian stocks rise.

Janet Yellen is speaking today at 12:30pm in Philadelphia, the last scheduled appearance by a central bank official before the next policy meeting concludes on June 15, and hopes are again high that she will provide some additional insight into what happens next. Considering just over one week ago she pushed the hawkish Fed case which has now disintegrated before everyone's eyes, we would be skeptical. During her May 27 appearance, the Chair strongly hinted at a June rate move, sending summer rate hike odds to their highest yet. It did not last.

Yellen will have to backtrack now after the dismal payrolls report last week led markets to doubt whether the Fed will raise rates this year, let alone this month. To be sure, she has her usual excuse: "the Fed is data dependent", and the data just fell out of the window.

According to Bloomberg, Yellen may need to update her tone slightly in response to renewed labor market uncertainty, perhaps softening or further qualifying her May 27 statement that an increase will probably be appropriate “in coming months.” Still, economists and strategists say it’s unlikely that she’ll give a more definitive timeline on when to expect the second hike in a decade. “We’re going to get a vague promise of future rate hikes that does not specify a date,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who expects a September increase. “You can’t claim data dependence, have the most recent data be what it was, and still take upward rate action.”

Meanwhile, markets are being pulled in different directions, with worries over a slowing U.S. economy and British polls weighing on some assets, while a weaker dollar and chances the Fed will keep interest rates lower for longer supporting others. Materials producers were the biggest gainers in both Europe and Asia as the Bloomberg Commodity Index headed for the highest close since October, with Brent crude above $50 a barrel and zinc extending its longest rally since 2013. Indonesia’s rupiah and Malaysia’s ringgit were the best performers among 31 major currencies after Friday’s U.S. payrolls report caused the Bloomberg Dollar Spot Index to tumble. The pound sank to a three-week low and Brexit concern also infected Spanish and Italian bonds and U.K. homebuilders.

“Stocks are flattish today because people are interpreting there won’t be a rate hike after the jobs report Friday and for me that’s very complacent because we shouldn’t forget the longer-term trend,” said Michael Woischneck, who oversees about 300 million euros ($341 million) at Lampe Asset Management in Dusseldorf, Germany. “Oil and commodities are better again and that’s also helping stocks, but it will be a very volatile week with the Brexit vote coming closer and closer.”

The Stoxx Europe 600 Index added 0.2 percent. Rio Tinto Group and Glencore Plc led a gauge of mining companies to the best performance of the 19 industry groups on the gauge as commodities surged. BP Plc pushed oil stocks higher as crude rebounded. The U.K.’s FTSE 100 Index climbed the most among major western-European markets, gaining 1 percent, as miners jumped and the pound weakened after the Brexit polls. Futures on the S&P 500 were little changed. Shares fell Friday after the disappointing U.S. jobs data cast doubt on the strength of the world’s biggest economy and on whether the Fed will raise rates at its next meeting. The MSCI Emerging Markets Index rose as much as 1 percent to a one-month high, advancing for a third day and climbing above its 50-day moving average. Benchmark gauges in Russia and the Philippines jumped over 1 percent. South Korea’s market is shut for a holiday.

Aside from the abovementioned Yellen speech, there is no macro data in the traditional post-payrolls weekly lull.

Market Snapshot

  • S&P 500 futures up less than 0.1% to 2099
  • Stoxx 600 up less than 0.1% to 341
  • FTSE 100 up 0.8% to 6256
  • DAX up 0.2% to 10128
  • S&P GSCI Index up 0.9% to 377.4
  • MSCI Asia Pacific up 0.3% to 130
  • Nikkei 225 down 0.4% to 16580
  • Hang Seng up 0.4% to 21030
  • Shanghai Composite down 0.2% to 2934
  • S&P/ASX 200 up 0.8% to 5360
  • US 10-yr yield up 1bp to 1.71%
  • German 10Yr yield up 1bp to 0.08%
  • Italian 10Yr yield up 14bps to 1.47%
  • Spanish 10Yr yield up 5bps to 1.52%
  • Dollar Index up 0.09% to 94.11
  • WTI Crude futures up 1.1% to $49.16
  • Brent Futures up 1.1% to $50.21
  • Gold spot down 0.3% to $1,241

    Silver spot up less than 0.1% to $16.42

Top Global News

  • China Must Get ‘More Adept’ on Monetary-Policy Signals: Lew; China must improve monetary policy communication as it takes on an increasingly large role in the global economy, U.S. Treasury Secretary Jacob J. Lew said
  • Fed’s Rosengren Says Important to See If Weak Jobs Were Anomaly: Boston Fed head says May payrolls contrast with other data; FOMC voter still expects sufficient growth for gradual hikes
  • Fed’s Yellen speaks in Philadelphia at 12:30pm
  • Pound Tumbles, Volatility Jumps After Polls Show Brexit Momentum: ITV poll shows Brexit ahead 45% to 41%; TNS has 43% to 41%; one-month volatility at 7-year high before June 23 vote
  • U.S. Economy Projected to Expand This Year by Least Since 2012: uncertainty on the presidential election weighs on outlook, according to a survey of forecasters by the National Association for Business Economics
  • Clinton Wins Puerto Rico Democratic Primary, Nears Nomination: Democratic front-runner widens lead on rival Bernie Sanders
  • ASCO WEEKEND WRAP: AbbVie, Bristol, Lilly, Stemline May Move
  • Tesla Challenger in China Plans to Debut $106,000 E- Roadster: Qiantu Motor plans to start production in Suzhou by year-end; Tesla May Purchase Batteries From Samsung SDI, Nikkei Says
  • Paramount’s ‘Ninja Turtles’ Opens to Slow Sales Over Weekend: movie opened to disappointing weekend sales in N. American theaters
  • Apple May Get Breather on Sourcing Rules in India: Times
  • McKinsey Said to Have Built $5b Internal Investment Arm: FT

Looking at regional markets, Asia stocks traded mixed as the region digested Friday's dismal NFP data and its implications for Fed policy. Nikkei 225 (-0.4%) significantly underperformed as the aforementioned data saw JPY strengthen firmly against the USD with USD/JPY briefly below 107.00. Conversely, material names elevated the ASX 200 (+0.8%) into positive territory as the softer greenback underpinned commodity prices. Hang Seng (+0.4%) and Shanghai Comp (-0.2%) saw choppy trade with sentiment clouded following a lacklustre CNY 40bIn liquidity injection, although downside across the Asia region was stemmed as the poor jobs data also dampened prospects of a sooner Fed hike. 10yr JGBs traded in positive territory as the lack of risk-appetite in Japanese equities fuels safe haven inflows benefiting bond prices.

Asian Top News

  • China’s Opening Bond Market a Threat to Hong Kong Connect Plans: HKEx bond link one of many ways to access China, says Haitong
  • Negative-Rate Job Half Done as Japan Banks Cut Bonds, Keep Cash: Banks’ JGB holdings drop 5.5% in April, as reserves rise 3.4%
  • Line Plans Year’s Biggest Tech IPO With Pitch to U.S. Investors: Japan’s messaging app to split IPO between Tokyo and New York
  • Temasek Unit Said to Plan Debt Tied to Private Equity Stakes: Astrea III plans to issue about $500 million notes in 4 parts
  • Lotte $4.9 Billion IPO Faces Fresh Setback on Bribery Probe: Korean prosecutors raid Hotel Lotte last week as part of probe
  • Stay or Go? Rajan’s Future Becomes Focus of India Rates Meeting: All 19 economists see RBI leaving rates unchanged Tuesday

European equities have also benefitted in the wake of Friday's eventful NFP release, with indices spending most of the session higher, although coming off best levels as we move into mid-morning (Euro Stoxx: +0.1%), with material and energy names among the best performers. As such, FTSE is the best performing index, led higher by Anglo American, Rio Tinto and BHP Billiton. Fixed income markets have sustained the upside seen last week, with Bunds continuing to trade near all-time highs, albeit relatively contained on the day given the lack of European supply or data and with net supply relatively steady this week.

European Top News

  • German Factory Orders Declined in April on Weak Export Demand: orders fell 2% on month compared with estimated 0.5% drop
  • Rothschild & Co. Buying Martin Maurel to Expand in France: deal creates bank with EU34b under management; Rothschild & Co should keep CET1 capital ratio above 18%
  • Nestle Seeks China Turnaround Online as Competitors Abound: E-commerce business more profitable than other retail channels
  • Swisscom Gains as Swiss Vote Against Pay Cap for Top Management: country votes against new rules for government- owned companies
  • EON Can’t Please Everyone as Shareholders Meet for Spinoff Vote: utility needs 75% shareholder approval for Uniper listing

In commodities, the Bloomberg Commodity Index rose 1.1% putting it on course for the highest close since Oct. 22, as oil and metals advanced. Brent crude added 1.2 percent to $50.25 a barrel, after falling 0.7 percent last week as OPEC refrained from freezing output at a meeting in Vienna. The global oil surplus is shrinking faster than expected and has the potential to send prices as high as $60 a barrel this year, according to Ali Majed Al Mansoori, chairman of the Abu Dhabi Department of Economic Development. Saudi Arabia, the world’s largest exporter, raised pricing on most oil grades in July. Zinc climbed as much as 1.9 percent in London, rising for an eighth day to its highest level since July 2015, buoyed by speculation that mine supply cuts will lead to a worsening deficit. Nickel gained 2.3 percent and copper rose 0.9 percent. Iron-ore futures in Dalian jumped 2.7 percent after the first decline in Chinese port inventories in three weeks. Stockpiles fell 0.4 percent last week to 100.25 million metric tons, according to data compiled by Shanghai Steelhome Information Technology Co

In FX, the most notable mover as noted last night was the pound which tumbled to to $1.4390, near session lows, on an ITV opinion poll that found 45 percent of Britons backed the ‘Leave’ campaign, compared with the 41 percent who were for ‘Remain.’ The numbers were 43 percent for ‘Leave’ and 41 percent for ‘Remain’ in a TNS survey. “If there’s any one other currency investors may want to go short on besides paring long dollar positions that would be sterling,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “There’s a binary event risk of much greater proportions than just a policy move.” The Bloomberg Dollar Spot Index was up 0.2 percent, after tumbling 1.5 percent in the last session following the U.S. jobs report. Payrolls climbed by 38,000 in May, less than the most pessimistic estimate in a Bloomberg survey. The yen weakened 0.6 percent to 107.19 per dollar, after a 2.2 percent surge on Friday that marked its biggest gain since April. The euro fell 0.2 percent, after a 1.9 percent gain on Friday that was biggest jump of the year. The MSCI Emerging Markets Currency Index rose 0.9 percent. Indonesia’s rupiah climbed 1.6 percent, and Malaysia’s ringgit strengthened 1.2 percent. China’s yuan fell to its lowest level against a basket of peers since November 2014 after the central bank strengthened the fixing by less than expected following a slump in the dollar.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade modestly higher as participants await direction from the US in the wake of Friday's NFP release and ahead of Yellen's upcoming speech
  • Despite recovering throughout the European session, GBP was dealt a blow overnight as the latest batch of polls lean in favour of the leave camp
  • The rest of the session is light in terms of data, and will see all focus on the much anticipated speech from Fed's Yellen this afternoon, which will garner even more attention in the wake of Friday's jobs release
  • Treasuries rally in overnight trading while global equities are mixed and US dollar index rises as GBP drops as polls in Britain show majority now favor exit from EU.
  • Pablo Iglesias, leader of the Spanish anti-establishment party Podemos, said the concessions European Union leaders gave David Cameron to help keep the U.K. in the bloc were “shameful”
  • Being opaque has been paying off for Janet Yellen. That’s one reason not to expect razor-sharp clarity as she speaks in Philadelphia later on Monday
  • China must improve monetary policy communication as it takes on an increasingly large role in the global economy, U.S. Treasury Secretary Jacob J. Lew said in an interview ahead of talks in Beijing between the two countries
  • Banks known as primary dealers, which trade directly with the Federal Reserve and bid at U.S. debt auctions, have bought just 30 percent of the new securities this year, the smallest share on record, data compiled by Bloomberg show
  • Negative interest-rate stimulus is half working in Japan, as lenders cut government bond holdings by the most in almost three years, only to hoard proceeds at the central bank
  • German factory orders declined in April as demand for investment goods from outside the 19-nation currency region slumped. Orders, adjusted for seasonal swings and inflation, fell 2 percent from the prior month

US Event Calendar

  • 10am: Labor Market Conditions Index Change, May, est. 0 (prior -0.9)
  • 12:30pm: Fed’s Yellen speaks in Philadelphia

DB's Jim Reid concludes the overnight wrap

Just in case you haven't seen the numbers from Friday payrolls were only 38k (vs. 160k expected and the lowest since September 2010) and were revised down 59k across the prior two months. Suddenly the  3-month average has fallen to 116k from 181k. As DB's Joe LaVorgna points out this is the weakest growth since July 2012, a couple of months before QE3 started. The good news is that the unemployment rate fell to 4.7% from 5.0% (vs. 4.9% expected) but perhaps there's an element that it's getting more difficult to hire. We should also acknowledge that the Verizon strike would have impacted these numbers so June's report will be important to see the impact reversed.

The weak report makes for an interesting appearance from Yellen tonight (5.30pm BST) as surely she can't confidently signal a summer hike now? However she was relatively hawkish when she spoke 10 days ago at Harvard so will one number knock her back to her normal dovish leanings. The market has certainly voiced its opinion. We've had a big round trip in June and July hike expectations over the last month. Only 4 weeks ago the probabilities were 4% and 17%. They then climbed to a peak of 34% and 54% on May 24th before landing at 4% and 27% this morning.

Interestingly risk assets in the US actually held up relatively OK by the end of play on Friday. The initial knee jerk reaction for the S&P 500 was to tumble -0.90% only to then steadily rise over the remainder of the session before finishing the day ‘just’ -0.29% lower. It was a similar story in credit where CDX IG was a couple of basis points wider initially before rallying back to finish pretty much flat. There was no such rebound for the US Dollar though with the Dollar index eventually ending -1.61%, the biggest one-day decline this year. It was one-way traffic for Treasuries too. 10y yields ended up at 1.700% and 10bps lower on the day, while 2y yields were down over 11bps to 0.774% and to the lowest level since mid-way through last month. Gold (+2.74%) snapped out of its recent funk in style for its strongest day since the 11th February.

This morning in Asia it’s fairly mixed for most regional bourses with the standout mover being in Japan again where a big rally for the Yen on Friday (+2.15%) has resulted in the Nikkei (-1.14%) and Topix (-1.17%) taking a steep leg lower this morning. Meanwhile the Hang Seng (-0.31%) is also lower this morning, while markets in China and Korea are little changed. The ASX (+0.85%) is the big outperformer this morning while US equity index futures are little changed.

Also attracting some headlines is over in the FX market where Sterling (-0.90%) has tumbled following further referendum polls over the weekend showing voters favouring leaving the EU. The poll run by YouGov for ITV had 45% voting to leave versus just 41% at remain, while a survey run by TNS had the split at 43% versus 41% in favour of leave. It’s worth noting that tomorrow evening we will see PM David Cameron and UKIP leader Nigel Farage take part in a live debate on Brexit with another debate (with speakers to be announced) scheduled for Thursday. Such has been the recent swings of late in polls that implied 1-month volatility in the GBP/USD pair has jumped to 21.5% this morning which is the highest now since February 2009.

Most of the other weekend newsflow has been a continuation of the fallout from Friday’s data, although one event worth highlighting is yesterday’s referendum in Switzerland on the unconditional basic income plan for all residents. The final results showed that 77% voted against the plan with just 23% favouring the introduction of a minimum income for all. The result won’t come as much of a surprise with the idea gaining little support amongst Swiss politicians or parties, but nonetheless the vote was closely watched internationally with the FT suggesting that local and national governments in Brazil, Canada, Finland, Netherlands and India are said to be debating the idea of a similar sort of basic income.

Switching back to Friday’s data and quickly recapping the rest of the May employment report. Average hourly earnings rose +0.2% mom in May which has had the effect of keeping the YoY rate unchanged at +2.5%. Average weekly hours were unchanged at 34.4hrs which was slightly disappointing given expectations were for a modest rise to 34.5hrs. The labour force participation rate dipped to 62.6% which was a decline of two-tenths and marks the second consecutive decline. Finally the broader U-6 measure of unemployment printed unchanged at 9.7% which is essentially where it has been for four months now.

Also contributing to the disappointing batch of releases on Friday was the ISM services reading which fell more than expected in May (-2.8pts to 52.9; 55.3 expected) with the reading now at the lowest level since February 2014. The employment component in particular (-3.3pts to 49.7) confirmed the weakness in the May payrolls number, while new orders (-5.7pts to 54.2) and business activity (-3.7pts to 55.1) components also softened. Elsewhere, there was a modest upward revision to the final services PMI (+0.1pts to 51.3), while the April trade deficit widened to $37.4bn from a revised $35.5bn.

We did get some initial reactions to Friday’s data from the Fed. Governor Brainard, a notable dove, was unsurprisingly the most cautious, saying that the report was ‘sobering’ and that ‘in this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals’. Brainard also made further comments on the upcoming UK EU referendum vote, warning that while the economic effects are difficult to quantify for Brexit ‘we cannot rule out a significant adverse reaction to such an outcome in the near term, such as a substantial jump in financial risk premiums’.

Meanwhile, Cleveland Fed President Mester was a bit more upbeat in her post-payrolls comments on Friday. A more hawkish leaner usually, Mester said that she still believes a gradual upward pace of rate hikes is appropriate although that ‘when the rate hikes will occur and the slope of that gradual path is data dependent’. Mester added that the weak employment number had not changed her economic outlook.

Over in Europe on Friday, the main take away from the price action was the reasonable underperformance for risk assets in the region. Indeed, unlike the rebound in the US the Stoxx 600 ended -0.89% as financials names dragged the index lower. It also capped what was a rough five days for European equities (-2.39%) following three straight weekly gains. Sovereign bonds were the big winners on Friday however. 10y Bund yields ended up nearly 5bps lower at 0.067% which is the lowest closing yield on record. That 0.049% intraday low struck back in April last year is suddenly well within sight again. Meanwhile 5y Bund yields tumbled even further into negative territory at -0.415%, while 8y (-0.202%) and 9y (-0.079%) yields all struck all time record lows.

Before we turn to the week ahead, there was actually some data in Europe to highlight on Friday which eventually got overshadowed by those across the pond. It was positive too with the final May composite PMI for the Euro area revised up 0.2pts to 53.1 following similar upward revisions for the manufacturing and services data. That composite level has been relatively stable for a few months now and our European economists noted that it is consistent with Euro area GDP growth of between +0.3% and +0.4% qoq in Q2.

Turning over now to this week’s calendar. It’s a quiet start to proceedings today with just Euro area investor confidence data and German factory orders this morning, while over in the US the usual post-payrolls lull is in effect with the labour market conditions index reading the only data of note. Tuesday morning during the Asia session we’ll have the usual focus on the China foreign reserves data, while the RBA cash rate decision is also due out (no change expected). In Europe on Tuesday the main data of note is the final revision for Q1 GDP in the Euro area (+0.5% qoq expected), while French trade data and German industrial production data is also due. Over in the US on Tuesday consumer credit, Q1 nonfarm productivity and unit labour costs and the IBD/TIPP economic optimism reading are the main releases of note. It’s set to be a busy morning in Asia on Wednesday where we’ll get China trade data for May (a slowdown in exports is expected) and the final revision for Q1 GDP in Japan. Over in Europe UK industrial production and French business sentiment data are due, while in the US the April JOLTS job opening report is the sole release on Wednesday. We’re in China again on Thursday when the May CPI (no change to +2.3% yoy expected) and PPI reports are due out. During the European session on Thursday the main data of note due out is the German and UK trade numbers for April. Over in the US meanwhile we’ll get the latest initial jobless claims print as well as the April wholesale inventories and trade sales report. In Europe on Friday we’ll get French industrial production and German CPI. We finish in the US on Friday with the May Monthly Budget Statement and a first take on the June University of Michigan consumer sentiment survey.

Away from the data, the big focus from a Fedspeak perspective will be on the comments from Fed Chair Yellen early this evening (5.30pm) BST when she is due to speak in Philadelphia addressing the World Affairs Council. Rosengren is also scheduled to speak sometime today or tomorrow in Helsinki. Over at the ECB meanwhile we are due to hear from Coeure (today), Nouy (Wednesday) and Draghi (on Thursday) – the latter of which is speaking at the Economic Forum in Brussels. Also worth mentioning this week are the various US presidential primaries on Tuesday including California, the release of the World Bank’s Global Economic Prospects 2016 report and an ITV televised debate between UK PM Cameron and UK Independence Party leader Farage on the UK EU referendum vote. The latter two events are also scheduled for Tuesday.