All Eyes On August Payrolls, As Global Stocks Rise In Bullish September Start; Yuan Surge Continues

With payrolls looming (our full preview is here), carbon-based traders around the globe are leery of putting on any major trades and so the overnight session has been rather dull, dominated by the now traditional overnight algo-mediated levitation, which means the VIX is lower and S&P futures are once again modest higher as European and Asian shares continue their ascent.

“A decent payrolls number today would be the icing on the cake in a week that has seen some positive signs that the U.S. economy may be in better shape than was previously thought prior to Jackson Hole,” analyst Michael Hewson at CMC Markets writes in note. “Annual hourly wage growth is currently 2.5%, a little on the weak side for an economy supposedly at full employment, so a strong number here could increase the odds of another rate rise this year, most likely in December.”

While we have penned a longer preview of today's jobs report, the only chart that may matter for today's payrolls print, expected at 180K, is the following from Morgan Stanley, which predicted the July print to the dot, and which anticipates a big miss in the August jobs number, at 136K vs the 180K expected (see full preview here).

The Stocks Europe 600 Index is higher for a third day, the Stoxx 600 up 0.4%, starting off September with solid gains - after three months of strong Euro-driven declines -  with media companies among the winners after Vivendi SA sales beat estimates. the final Eurozone August manufacturing PMI printed as expected, and unchanged from the flash print, at 57.4. In a month traditionally reserved for time at the beach, euro- area factories increased output at one of the fastest rates since 2011. U.K. manufacturing expanded at the strongest pace in four months in August, lifted by both export orders and domestic demand. The Markit manufacturing PMI rose to 56.9 from a revised 55.3 in July, beating the consensus estimate of 55.

The LME Index of six industrial metals soared to the highest in almost three years, with copper leading the charge following another strong Chinese PMI print overnight (see below). The U.K.’s FTSE 100 Index increased 0.9 percent to the highest in more than two weeks.

“European markets and U.S. futures are trading higher ahead of the most-watched economic data on the face of the Earth,” Naeem Aslam, chief market analyst at Think Markets U.K., said by email. “What traders have priced in very much in the market is that the Fed is going to struggle with respect to any further rate hike for this year.”

Hawkish comments from ECB’s Nowotny on Friday morning briefly lifted EUR across the board and weighed on bund futures.

Emerging market stocks were higher after still cheering their eighth straight month of gains as China’s yuan hit a fresh 14-month high and metals markets continued to rally. Industrial bellwether copper was up 0.4 percent at $6,818 a tonne. The LME contract price touched a peak of $6,872 on Thursday, the highest since September 2014.

Japan’s benchmark bond yield fell below zero percent for the first time since November 16, sliding 1.5bps to -0.005%. The decline was unexpected as earlier in the session the Bank of Japan reduced its purchases of 3-to-5-year govt notes by 30b yen, to 300b yen from 330b yen on August 28 while keeping other maturity buckets unchanged. This marked a third open market purchase reduction in the past month, with cuts in the 5-to-10 year zone previously. Banks quickly jumped on the supply-shortage driven tapering bandwagon and, as Mitsubishi UFJ said "unless the BOJ cuts purchases further, the yield decline will deepen" while Makoto Suzuki, strategist at Okasan Securities, said that "even a further decrease in bond purchases is unlikely to cause a spike in yields."

The drop in 10-year Japanese government bond yield below zero percent paves the way for further cuts in purchases at Bank of Japan’s next relevant market operation, said Akio Kato, general manager of trading at Mitsubishi UFJ Kokusai Asset Management. "Without a cut in purchases, yields will fall too low, given that the yield today fell below zero even as the BOJ reduced amount in 3-5 year zone" Kato added. "If the BOJ continues to cut a couple more times this month, annual buying would fall below 60t yen, calling into question the 80t yen annual monetary expansion target" the strategist said, cited by Bloomberg.

Anyway, back to Asia ex Japan, where with the North Korean crisis forgotten, at least until the next time Kim lobs a handful of missiles over Japan and this time he hits something, South Korea’s won and China’s yuan gained while most other Asia’s emerging currencies were steady ahead of U.S. jobs data and amid holidays in some major Southeast Asian markets. The ASX 200 (+0.1%) and Nikkei 225 (+0.2%) were both supported at the open, but then pared some gains as the financial sector dragged alongside declining yields. Shanghai Comp. (+0.2%) and Hang Seng (flat) initially traded positive (Hang Seng pared gains heading into the close) despite a net weekly liquidity drain by the PBoC, as participants cheered better than expected Chinese Caixin Manufacturing PMI which printed a 6-month high and showed New Orders and Exports components advanced at the fastest pace in multiple years. Government bonds were mixed while the MSCI EM Asia Index of shares advanced, supporting risk sentiment.

“It’s hard to take any significant position before the U.S. jobs data,” Koji Fukaya, CEO at Tokyo-based FPG Securities, told Bloomberg. “The U.S. economy is solid and the Chinese economy has been stabilizing while the stocks are rising. Such a situation supports emerging currencies due to growing exports and portfolio inflows.”

The Bloomberg Dollar Spot Index was little changed following an overnight loss after a weak inflation report and Treasury Secretary Steven Mnuchin’s comments that a weaker dollar is “somewhat better” for U.S. trade. The yen, the Australian and New Zealand dollars weakened even after Caixin China manufacturing PMI for August beat estimates. Speaking of China's "other" PMI indicator, one day after the official manufacturing survey sent commodities surging, the Caixin Manufacturing PMI printed at 51.6 for August, beating expectations of 51.0, and above July's. The New orders sub-index rose by fastest pace
in more than 3 years and exports rose at the fastest pace in 7 years.

Speaking of China, the onshore yuan headed for a 1.2% gain this week, the biggest advance since at least 2007. The CNY strengthened 0.5% to 6.5595 per dollar after the PBOC strengthened the yuan reference rate 0.15% to 6.5909 to the USD. The average year end forecast is 6.5896, according to 15 traders and analysts in a Bloomberg survey, so we are already below it.

While Harvey continues to drift inland, its impact remains. Below is a summary courtesy of Bloomberg of what’s shaping the oil market on Friday:

  • Explorer Pipeline planning to start lines over the weekend as full impact of storm Harvey on crude, product markets continues to play out.
  • Petro-Logistics says OPEC’s August supply fell about 400k b/d. String of U.S. data due later, including nonfarm payrolls.
  • Logjam grows to 29 oil tankers as 11 ports remain closed
  • Total Port Arthur is said facing extended shutdown on power loss
  • Texas storm bucks N.Y. traders with wild gasoline expiry swings
  • NHC issues final advisory on Harvey; losing tropical character

More worrying is what is coming after Harvey, which as we described yesterday, is Hurricane Irma, which one Weather Channel meteorologist described as having the "highest windspeed forecasts I've ever seen."

Oil traders in particular will be closely following Irma's path, which some models see striking the Gulf of Mexico just two weeks after Harvey left historic damage and devastation in its wake.

Speaking of oil, crude gave up much of Thursday’s increase, while gasoline remained at an elevated level after Tropical Storm Harvey knocked out a quarter of refining capacity. West Texas Intermediate crude fell 1.2 percent to $46.65 a barrel. Copper gained 0.3 percent to $6,807.50 per metric ton, the highest in almost three years. Gold fell 0.2 percent to $1,318.20 an ounce, the biggest fall in more than a week.

In rates, the yield on 10-year Treasuries climbed one basis point to 2.12 percent. Germany’s 10-year yield gained one basis point to 0.37 percent. Britain’s 10-year yield increased less than one basis point to 1.034 percent. Japan’s 10-year yield dropped one basis point to -0.001%.

Friday's econ data include August employment and jobless rate, Markit manufacturing PMI and ISM manufacturing as well as July construction spending and August auto sales. The second round of negotiations for The North American Free Trade Agreement (NAFTA) begins in Mexico City

Bulletin Headline Summary from RanSquawk

  • European equities kick-off the month on the front-foot as participants await today’s US jobs report
  • FX markets remain tentative ahead of NFP, while energy markets pull-back modestly from yesterday’s gains
  • Looking ahead, highlights include US NFP, ISM Manufacturing and Baker Hughes

Market Snapshot:

  • S&P 500 futures up 0.07% to 2,471.75
  • VIX down 1.8%, or -0.21 to 10.38
  • STOXX Europe 600 up 0.4% to 375.52
  • MSCI Asia up 0.2% to 161.18
  • MSCI Asia ex Japan up 0.2% to 533.64
  • Nikkei up 0.2% to 19,691.47
  • Topix up 0.1% to 1,619.59
  • Hang Seng Index down 0.06% to 27,953.16
  • Shanghai Composite up 0.2% to 3,367.12
  • Sensex up 0.5% to 31,880.62
  • Australia S&P/ASX 200 up 0.2% to 5,724.59
  • Kospi down 0.2% to 2,357.69
  • German 10Y yield fell 0.2 bps to 0.359%
  • Euro down 0.1% to $1.1897
  • Italian 10Y yield fell 3.3 bps to 1.753%
  • Spanish 10Y yield fell 1.2 bps to 1.55%
  • Brent Futures little-changed at $52.42/bbl
  • Gold spot down 0.2% to $1,319.51
  • U.S. Dollar Index up 0.05% to 92.72

Top Overnight News:

  • Trump Is Said to Weigh Tying Debt Limit Increase to Harvey Aid
  • CEOs Urge Trump to Keep ‘Dreamers’ Program for Immigrants
  • Trump Cuts to Obamacare’s Ads Threaten Law’s Fragile Markets
  • World’s Most Important Chemical Made Rare Commodity by Harvey
  • Boeing Tanker Fuel Hose Scraping Jets Raises Air Force Alarms
  • Billionaire Birla Is Said to Weigh Constellium, Aleris Bids
  • Lululemon FY Adj EPS View Beats Highest Est.
  • PANW 1Q Rev. View Midpoint Beats Est.; Shares Rise 3.1%
  • Russia’s Power Machines Vies With GE for Hungary Contract: RIA
  • Macau Aug. Casino Rev. Rises 20.4% Y/y; Est. 18.5% Rise
  • Coca-Cola Eyes Number Three Spot for India Globally, TOI Says
  • Google Wins Approval of Email Privacy Class Action Settlement
  • Former Goldman Compliance Chief to Advise SEC’s Clayton on MiFID
  • Amazon Is Said to Plan Canada Prime Now Launch This Year: WSJ
  • Southwest Air Rushes to Ensure Fuel Supply Amid Storm Damage

Asia stocks traded mostly positive after the upbeat tone from Wall St where the Nasdaq printed a fresh record close and sentiment was lifted amid tax reform hopes amid comments from US Treasury Secretary Mnuchin. Furthermore, the region also welcomed strong Chinese Caixin PMI data, although gains were mild amid the looming key-risk NFP release. ASX 200 (+0.1%) and Nikkei 225 (+0.2%) were both supported at the open, but then pared some gains as the financial sector dragged alongside declining yields. Shanghai Comp. (+0.2%) and Hang Seng (flat) initially traded positive (Hang Seng pare dgains heading into the close) despite a net weekly liquidity drain by the PBoC, as participants cheered better than expected Chinese Caixin Manufacturing PMI which printed a 6-month high and showed New Orders and Exports components advanced at the fastest pace in multiple years. 10yr JGBs were mildly higher amid a decline in Asia-Pac yields and with the BoJ also present in the market for an amount just shy of JPY 1tln in JGB with maturities ranging up to 10yrs. Chinese Caixin Manufacturing PMI (Aug) 51.6 vs. Exp. 51.0 (Prev. 51.1). (Newswires) New orders sub-index rose by fastest pace in more than 3 years and exports rose at the fastest pace in 7 years. PBoC skipped open markets operations for a net weekly drain of CNY 280bln vs. last week's CNY 330bln drain. PBoC set CNY mid-point at 6.5909 (Prev. 6.6010).

Top Asian News

  • Modi to Revamp Cabinet to Revive Economy Before Key India Polls
  • Tencent Music Is Said to Seek Pre-IPO Funds at $10 Billion Value
  • Chinese Billionaire Plots Rescue of a Great British Carmaker
  • Caixin China Aug. Manufacturing PMI 51.6; Est. 51
  • Rupee Resilience After India GDP Miss ‘Surprising’: StanChart
  • China Steel Futures Surge to Record as Plant Fire Fuels Gains

European stocks up for September's first trading day after three consecutive months of losses. CAC 40 boosted by Vivendi shares which confirmed its outlook for the year and stated that its struggling Canal Plus pay TV was showing signs of improvement. Volvo shares also tracking higher after setting new financial targets. ECB's Constancio says Euro Area recovery becoming increasingly robust. ECB's Nowotny says that as long as inflation is low, he does not see the need for higher interest rates. Quiet trading overall with Bunds holding a relatively narrow range this morning. Peripherals performing better relative to core debt with the German-Portuguese spread tightening by some 2.7bps, Italy also narrower by circa 1.5bps.

Top European News

  • Stalled Brexit Talks Pile Pressure on May to Negotiate Deal
  • U.K. Manufacturing Unexpectedly Accelerates to Four-Month High
  • Ruble Defies August Curse, Sanctions for Monthly Gain: Chart
  • Gemalto Slides; Bryan Garnier Sees Potential for Another Warning
  • Europe Miners Gain; Steel Stocks Remain Volatile: Deutsche Bank
  • Sophos Gains After Palo Alto Said Demand Environment ‘Solid’
  • ECB’s Nowotny Says Japan Shows EU Must Move Fast to Repair Banks

In currencies, the EUR is marginally weaker this morning, largely following from yesterday’s ECB source reports over EUR appreciation, alongside the mild uptick in the greenback. The theme for EUR as we head towards the ECB meeting may well be on speculation that Draghi and Co. may highlight risks to the appreciating currency. As such, EUR could possibly be pressured ahead of the monetary policy decision. Today, there are chunky expiries that may magnetise price action with 2.6bln worth of vanilla options from 1.1870-1.1900. The US Dollar is slightly firmer this morning, ahead of the US job numbers (Exp. 180k), also as tensions between North Korea and the US has seemingly eased off since the beginning of the week. In turn, this has seen USD/JPY break back above 110.00 amid the slight improvement in risk sentiment. Cable received a small uptick from better than expected UK Mfg. PMI which also showed an upward revision. However, sentiment remains bearish for the currency with Brexit talks showing little signs of progress.

In commodities, it is the same story for crude prices, with flooding at US refineries after Hurricane Harvey continuing to weigh on prices.

Looking at the day ahead, the final August PMIs for Germany, Eurozone, UK, France and Italy are due this morning. In the US, the highlight is the employment report for August. The August ISM manufacturing print (56.4 expected) is also worth keeping an eye while the July construction spending and University of Michigan confidence isurvey is also due. Away from the data, ECB governing council member Nowotny joins a panel discussion and ECB VP Constancio will speak. Elsewhere, the second round of NAFTA negotiations begins in Mexico City.

US event calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 209,000
    • Unemployment Rate, est. 4.3%, prior 4.3%; Underemployment Rate, prior 8.6%
    • Average Hourly Earnings MoM, est. 0.2%, prior 0.3%; YoY, est. 2.6%, prior 2.5%
    • Average Weekly Hours All Employees, est. 34.5, prior 34.5; Labor Force Participation Rate, prior 62.9%
  • 9:45am: Markit US Manufacturing PMI, est. 52.5, prior 52.5
  • ISM Manufacturing, est. 56.5, prior 56.3
    • ISM Prices Paid, est. 62, prior 62
    • ISM New Orders, est. 60, prior 60.4
    • ISM Employment, prior 55.2
  • 10am: U. of Mich. Sentiment, est. 97.5, prior 97.6; Current Conditions, est. 110.9, prior 111
    • 10am: U. of Mich. 1 Yr Inflation, prior 2.6%; 5-10 Yr Inflation, prior 2.5%
  • 10am: Construction Spending MoM, est. 0.5%, prior -1.3%
  • Wards Total Vehicle Sales, est. 16.6m, prior 16.7m; Domestic Vehicle Sales, est. 12.9m, prior 13m

DB's Jim Reid concludes the overnight wrap

Well August has flown by in a hurry. It wasn’t quite the typical quiet final month of summer that we might have expected with the headlines out of Washington – namely the debt ceiling debate but also signs of  further friction in Trump’s inner circle – and North Korea being enough to keep markets on their toes. In the end though markets are heading into September on the front foot helped in part by some upbeat macro data in the last few days. A slight upside surprise in the July CPI data for the Eurozone yesterday continued the positive momentum, while inflation data in the US later in the afternoon, while far from spectacular, at least came in in-line with market expectations. More details on that later.

As you’ll see in the day ahead at the end we’re ending the week today with a bit of a bang too. As always payrolls will likely be front and centre. For what it’s worth the market consensus is running at 180k for August following a 209k print in July. Following the decent ADP print on Wednesday (237k vs. 185k expected) our US economists revised up their payrolls estimate to 200k from 185k. They note that the details in the ADP suggest that the Amazon hiring spree proved an upside risk and as such that was the basis for their change in forecast. All that said we have been arguing that inflation and the debt ceiling have arguably taken over as the bigger issues for the Fed outlook right now so while not completely dampening down the importance of payrolls, it feels like the data is not quite as significant as it once was in the past. With that it’ll be worth keeping an eye on the associated wages data in the employment report (+0.2% mom and +2.6% yoy consensus). Later on we’ll also get the August ISMs while this morning we’ll get the final PMI revisions in Europe. So plenty to get through.

As noted at the top, risk assets generally had a pretty decent final day of August. The S&P 500 closed +0.57% last night and with that took its run of consecutive daily gains to 5 days and the longest streak since the 7-day run in May. That came after the Stoxx 600 had closed +0.77% which means the index has rallied +1.47% in the last two sessions and the most in a month and a half. That move was once again partly helped by an early fall for the Euro which touched the lowest level since Friday, but then reversed and closed +0.22% higher for the day. The early driver appeared to be a Reuters report suggesting that the recent appreciation in the single currency was concerning a growing number of ECB policymakers, which in turn was building the pressure for a more gentle reduction in the pace of QE. Late in the afternoon the reversal came after US Treasury Secretary Steven Mnuchin said “having a weaker USD is somewhat better for us (as it relates to trade)”. Following on, he also said that the additional spending needed to help Texas may reduce the amount of time Congress have to increase the debt ceiling limit by “a couple of days”. This ties in with reports that Trump is considering attaching an increase in the US debt limit to an initial request to  Congress for disaster relief funding of $6bn for Hurricane Harvey.

Sterling was also a notable mover intraday, but like the Euro also ended slightly up (+0.04%) for the day at 1.2930 after the USD weakened. All the talk yesterday was about more signs of Brexit talks failing to progress with the EU saying the UK has not outlined its position clearly, while the UK hit back by saying that the EU is not being flexible. It appears that the key sticking point is agreeing on the UK’s financial settlement. There is no confirmed figure but the European Commission’s Juncker had suggested before it could be 60bn Euros after factoring in budget commitments, pensions and pledge contingencies. A recent poll by ICM showed 65% of British tax payers believed 20bn was already too much.

Jumping over to Asia now where the Caixin manufacturing PMI for China in August was slightly stronger than expected at 51.6 (vs. 51.0 expected) and up from 51.1 in July. This confirms the manufacturing PMI earlier this week. While we’re with China, it’s worth noting a date in your diaries as later in the year on 18th October, 2,300 delegates will meet in Beijing for the 19th Communist Party Congress meeting where the focus will be on potential changes to leadership posts and a party report that will set out the key government policy for the next five years.

This morning markets are for the most part flat to modestly firmer. The Hang Seng (+0.31%), Shanghai Comp (+0.58%) and ASX (+0.15%) are all up while the Kospi and Nikkei are flat.

Moving onto yesterday’s macro data. With regards to that inflation data in the US, while the July core PCE was in line at +0.1% mom and +1.4% yoy, the annual rate is now the lowest since December 2015 and well below the Fed’s target of 2%. Elsewhere, the personal income data was solid. Personal income grew faster than expected at +0.4% mom (vs. +0.3% expected) but personal spending missed slightly at +0.3% mom (vs. +0.4% expected). Elsewhere initial jobless claims remained low at 236k and continuing claims at 1,942k. Meanwhile the Chicago PMI was higher than expected at 58.9 (vs. 58.5 expected) although flat versus last month, while pending home sales disappointed with a -0.8% mom decline (vs. +0.3% expected).

Over in Europe, the Eurozone’s headline inflation was a tad higher, driven by energy costs, but core inflation was in line at +1.2% yoy, which is above the lows of recent years but unlikely to be enough to prompt  the ECB to alter course. Elsewhere, the inflation print for France was in line at +0.6% mom while Italy’s inflation was slightly higher than expected at +0.1% mom (vs. 0.0% expected). Elsewhere the unemployment rate for the Eurozone was in line at 9.1% yoy. Finally, Germany’s July retail sales remained volatile and was slightly lower than expected at -1.2% mom (vs. -0.6% expected).

Looking at the day ahead, the final August PMIs for Germany, Eurozone, UK, France and Italy are due this morning. In the US, needless to say the highlight is the aforementioned employment report for August. The August ISM manufacturing print (56.4 expected) is also worth keeping an eye while the July construction spending and University of Michigan confidence isurvey is also due. Away from the data, ECB governing council member Nowotny joins a panel discussion and ECB VP Constancio will speak. Elsewhere, the second round of NAFTA negotiations begins in Mexico City.