Dollar Rebounds, Futures Rise Ahead Of Surge In Payrolls

One day after the dollar slumped sharply on initial disappointment with the GOP tax plan, the greenback has rebounded ahead of a nonfarm payrolls report that is expected to show the US economy gained over 300,000 jobs in the post-hurricane rebound, and as investors reassessed the latest news on U.S. tax-cut plans. Stocks in Europe and Asia advanced, US equity futures were as usual in the green, while oil headed for an eight-month high on signs OPEC will agree to extend supply cuts.

In an otherwise quiet session, the biggest overnight news was President Nicolas Maduro announcing Venezuela will seek to restructure its global debt after the state oil company makes one more payment. While the risk of contagion is low, the emerging-market index of currencies declined for the first time this week. In early trading, the PDVSA dollar bonds maturing 2027 plunged at the start of trading, slumping 10 cents on the dollar to 20 cents in early London trading. As a result, EMFX weakened across the board with some analysts noting the Venezuela debt restructuring as a driver, though most weakness occurred after Turkey’s inflation report.

In global macro, markets are in their usual pre-NFP lull, with most G-10 currencies staying within yesterday’s ranges. The weakest quarter for Australian retail sales in seven years sent the Aussie lower and bonds climbing. The Aussie dollar dropped as much as 0.5 percent back below 77 U.S. cents and bond yields extended declines as traders pushed back bets on the timing for an interest-rate increase. The Bloomberg Dollar Index was steady in Asia, amid modest moves in most G-10 currencies, before edging higher with the start of the London session as fast-money names added dollar longs before U.S. jobs report.  Treasury futures were stuck in tight ranges through Asian hours, on very muted volumes, just 37% of recent averages, with cash markets closed for a Japan holiday; as Bloomberg reports, TSYs came under pressure in London, widening vs Germany.

European stocks are little changed, heading for a second consecutive weekly gain, as investors weigh earnings results and the latest U.S. tax-cut plans. The Stoxx Europe 600 Index gains less than 0.1%. Shares of automakers are among the biggest sector gainers, led by a 4% advance in Renault after France cut its stake in the company. A retreat in Austria's Erste Group and French Societe Generale pulled banks lower after the Paris-based lender said revenue from the equities division tumbled 19% from a year earlier.

Asian stocks outside Japan, which was closed for a holiday, edged higher and were poised for a weekly gain on the back of technology stocks. MSCI Asia Pacific Index excluding Japan rose 0.1% to 556.9. Semiconductor Manufacturing International Corp. led gains Friday as Apple’s forecast for holiday sales buoyed suppliers in Asia. Chinese stocks capped their biggest weekly decline in three months, in the wake of the Communist Party Congress and a bond market selloff. In Hong Kong, Cnooc and PetroChina advanced this week as oil extended gains from the highest close in more than two years. The Philippines stock benchmark declined from yesterday’s record-high close, which followed a two-day holiday. “The index’s rise has been too steep so this is a healthy correction,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc.

A quick look at China, where local stocks capped the biggest weekly decline since Aug. 11, led by brokerages and technology shares, in the wake of the Communist Party Congress and a bond market selloff.  The Shanghai Composite dropped 0.3% at the close, extending retreat this week to 1.3%, while the ChiNext Index dropped 0.8%, taking the loss over last five sessions to 3.3%; that’s most since July 14. Curiously the drop happened even as the PBOC skipped reverse repos to offer 404 billion yuan of one-year MLF loans, taking total liquidity injections to over a trillion yuan this week.

Meanwhile, looking at the day ahead, October payrolls probably surged in October, according to sellside consensus (full preview here) rebounding from a hurricane-depressed September, while wage growth is expected to continue. The shift in focus to data follows a drop in Treasury yields Thursday as President Donald Trump confirmed that Federal Reserve Governor Jerome Powell is his pick to chair the central bank.

Oil extended gains from the highest close in more than 2 years on signs OPEC will agree to extend supply cuts when ministers meet in Vienna at the end of the month. Brent crude gained over half a percent to $61.05 per barrel. The benchmark hit $61.70 on Wednesday, its highest since July 2015. U.S. crude gained 0.6 percent to $54.90, almost 30 percent above its June lows. Iraq, the 2nd-biggest OPEC producer, backed extending the curbs for further 9 months, Oil Minister Jabbar al-Luaibi says in Baghdad. While ministers from Saudi Arabia and Kuwait say this week longer cuts are needed, consensus on how long to prolong is yet to be decided. A decision this month on an extension is not certain, according to Russian Energy Minister Alexander Novak. “I think it’s a done deal, the only issue to be discussed is that, do they extend it for six months or nine months,” Fereidun Fesharaki, founder and chairman of energy industry consultant FGE, says in a Bloomberg TV interview.

Elsewhere in commodity markets, spot gold was steady at $1,276.81 an ounce, after touching its highest since Oct. 20 at$1,284.10 on Thursday. London nickel prices renewed their advance, putting the metal on course for a gain of nearly 10 percent this week and 27 percent year-to-date on expectations of bullish demand from the electric vehicle battery sector. 

Bulletin Headline Summary from RanSquawk

  • Markets await NFP with the Street looking for a strong bounce-back this month after hurricane-related disruptions last month
  • GBP struggles to regain much ground against its major despite an impressive services PMI release
  • Looking ahead, highlights include US NFP, ISM Non-Manufacturing, ECB’s Coeure and Fed’s Kashkari

Market Snapshot

  • S&P 500 futures up 0.05% to 2,578
  • STOXX Europe 600 up 0.1% to 395.37
  • MSCI Asia up 0.01% to 169.98
  • MSCI Asia ex Japan up 0.1% to 556.89
  • Nikkei up 0.5% to 22,539.12
  • Topix up 0.4% to 1,794.08
  • Hang Seng Index up 0.3% to 28,603.61
  • Shanghai Composite down 0.3% to 3,371.74
  • Sensex up 0.3% to 33,680.28
  • Australia S&P/ASX 200 up 0.5% to 5,959.88
  • Kospi up 0.5% to 2,557.97
  • German 10Y yield fell 1.5 bps to 0.357%
  • Euro down 0.1% to $1.1645
  • Italian 10Y yield fell 0.8 bps to 1.531%
  • Spanish 10Y yield fell 1.3 bps to 1.47%
  • Brent Futures up 0.4% to $60.86/bbl
  • Gold spot down 0.02% to $1,275.91
  • U.S. Dollar Index up 0.1% to 94.80

Top Overnight News

  • With a resume steeped in industry experience and long- standing relationships with financial executives, Jerome Powell is expected to take a measured approach to rolling back regulations adopted in the wake of the 2008 economic crisis. He’s seen as a practical, not ideological, watchdog who will be able to get things done
  • Bond managers welcome Powell as dovish, deregulatory Fed Chair
  • Apple Fired Up About iPhone X Sales; Strong Payrolls Growth Anticipated; Venezuela Will Restructure All Debts
  • Apple Inc. is fixing supply problems with the iPhone X, its most important device in years, setting the company up for a better-than-expected holiday period
  • President Nicolas Maduro said Venezuela will seek to restructure its global debt after the state oil company makes one more payment, blaming U.S. sanctions for making it impossible to find new financing
  • House Republicans announced a tax proposal Thursday that would cut the U.S. corporate tax rate to 20 percent, reduce most of the individual tax brackets, and cap the mortgage- interest deduction on new purchases of homes
  • The U.S. real estate industry reeled as the House Republican tax bill proposed capping the mortgage-interest deduction, a long-cherished incentive many Americans have had to buy a house
  • Singaporean prosecutors and police are examining Goldman Sachs Group Inc.’s relationship with the Malaysian state investment fund at the center of global money laundering probes
  • BOE Deputy Governor Ben Broadbent says in BBC radio interview that U.K. may need higher rates to get inflation back to 2 percent goal: “Given the outlook currently, we anticipate we’ll need maybe a couple of more rate rises to get inflation back on track while at the same time supporting the economy,” he said
  • China’s October Caixin services PMI came in at 51.2 vs estimate of 50.6; Composite PMI at 51.0 vs estimate of 51.4
  • Singaporean prosecutors and police are examining Goldman Sachs Group Inc.’s relationship with the Malaysian state investment fund at the center of global money laundering probes, people with knowledge of the matter said
  • ECB’s Nowotny: inflation is moving in the right direction; economy is improving substantially, but we’re not there yet
  • U.K. Oct. Services PMI: 55.6 vs 53.3 est; Markit notes cost pressures eased -- a sign future inflation may cool, which would lower probability of additional imminent rate hikes
  • China Oct. Caixin services PMI 51.2 vs 50.6 prev.

It was a very quiet session in Asia with newsflow and tier 1 data releases on the lighter side. The ASX 200 (+0.5%) had been supported by mining names as iron ore prices continued to rise amid reports that capacity curbs in top steelmaking city Tangshan may fall short of expectations. Mixed trade in China with the Hang Seng (+0.3%) marginally higher while the Shanghai Comp (- 0.3%) dismissed the firmer than expected Services PMI reading. Elsewhere, Apple suppliers (Hon Hai and Largan Precision) in Taiwan have outperformed, which initially lifted the Taiwanese Index (-0.1%) after strong earnings from Apple. As a reminder, Japanese markets were closed for culture day. PBoC sets CNY mid-point at 6.6072 (Prev. 6.6196) PBoC drains a net CNY 110bln via open market operations this week vs net CNY 390bln injection last week.

Top Asian News

  • PBOC Moves to Steady Money Supply After Sovereign Bond Tumble
  • China Is Said to Investigate Leshi for Suspected IPO Fraud
  • En+ IPO Priced at $14/Share, Implying $8b Valuation
  • JPMorgan Says It Boosted Greater China Equity Team 20% in 2017
  • China Steps Up Scrutiny of Overseas Deals as M&A Persists
  • IPhone X Resellers Make a Quick Buck on the Streets of Hong Kong
  • Indonesia Threatens EU With Retaliation in Palm Oil ‘Trade War’

European equities kicked off the final trading session of the week of an a relatively directionless footing (Eurostoxx 50 flat) as markets take a breather from what’s been a relatively busy week and look ahead to today’s US jobs report. In terms of sector specifics, energy names outperform amid support from recent upside in Crude prices whilst financials lag amid lacklustre earnings from SocGen which have sent company shares to the bottom of the CAC with losses of 3.2%. Elsewhere, Altice shares are seen lower by 7.9%, amid a disappointing update which saw the Co. downbeat on their earnings guidance. Bunds saw little in the way of noteworthy price action at the Eurex open with prices relatively contained as with other asset classes across the continent. Thereafter, paper took the lead from gilts which saw a further extension on yesterday’s gains as markets continue to digest yesterday’s BoE announcement. Thereafter performance in Bunds diverged from UK paper after running into resistance. Central bank speak from the likes of Weidmann, Nowotny and Broadbent has done little to inspire any further price action in the fixed income space. Elsewhere, talk in the market suggests that Portugal are expected to tap the market next week with around EUR 1bln of supply.

Top European News

  • Air France-KLM Profit Surges 39% as Tourism, Fares Rebound
  • TP ICAP Loses CFO Baddeley After Just 18 Months in the Job
  • Vivendi Is Limited Again by Government on Telecom Italia
  • Smith & Nephew Plans to Review Cost Base Under Investor Pressure

In currencies, the main data point for FX markets has come in the form of UK services PMI which printed at 55.6 vs. Exp. 53.3. This subsequently lifted GBP/USD higher by around 25 pips amid the potentially encouraging view of Q4 UK GDP that can be deduced from this reading. However, the data wasn’t enough to prove too much sustained reprieve for GBP as sellers largely retraced a bulk of the move. Elsewhere, the USD index trades modestly higher ahead of today’s US jobs report but moves could be contained due to USD 5bln in option expiries between 113.80-114.50. AUD remains softer with AUD/USD extending losses below 0.7700 following disappointing domestic retail sales figures.

In commodities, oil prices have edged higher throughout European trade in a continuation its recent trend with the growing sense that the current production cuts will be extended until the end of 2018 (OPEC to meet on November 30th). Gold prices have traded in sideways fashion with the price of the precious metal up slightly. Iron ore prices continued to rise amid reports that capacity curbs in top steelmaking city Tangshan may fall short of expectation.

Looking at the day ahead, we’ve got a busy end to the week for data. The highlight is this afternoon with the October employment report in the US including that latest monthly nonfarm payrolls print. Away from that we’ve got the UK’s remaining October PMIs and the ISM non-manufacturing, final durable and capital goods orders for September, factory orders for September and the final PMIs in the US. Away from the data, the Fed’s Kashkari will also speak in the afternoon and the ECB’s Coeure in the evening. President Trump is also due to depart on his 11-day trip to Asia.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 313,000, prior -33,000
    • Unemployment Rate, est. 4.2%, prior 4.2%
    • Average Hourly Earnings MoM, est. 0.2%, prior 0.5%; YoY, est. 2.7%, prior 2.9%
    • Labor Force Participation Rate, est. 63.1%, prior 63.1%; Underemployment Rate, prior 8.3%
  • 8:30am: Trade Balance, est. $43.2b deficit, prior $42.4b deficit
  • 9:45am: Markit US Services PMI, est. 55.9, prior 55.9; Markit US Composite PMI, prior 55.7
  • 10am: ISM Non-Manf. Composite, est. 58.5, prior 59.8
  • 10am: Factory Orders, est. 1.2%, prior 1.%; Factory Orders Ex Trans, prior 0.4%;
  • 10am: Durable Goods Orders, est. 2.0%, prior 2.2%; Durables Ex Transportation, prior 0.7%; Cap Goods Orders Nondef Ex Air, prior 1.3%

DB's Jim Reid concludes the overnight wrap

One thing that caught our eye yesterday when dissecting the first Bank of England rate hike in a decade was just how different the world looked only ten years ago. George Bush and Gordon Brown were the respective President and Prime Minister, the average price of a London home was ‘just’ £261k compared to £471k now, Rihanna was number one in the charts with the hit ‘Umbrella’ and the Apple iPhone was less than a week old. That iPhone also ‘only’ cost £269 which looks like a bargain compared to the price of the iPhone X which debuts in stores today at £1000. Following his house completion yesterday, it’s probably best to refrain from letting Jim know just how much he’s spent on Apple products in the last ten years.

A decade ago in markets, 10y Gilts were also trading at 5.520% and Sterling would have bought you $2.011. Fast forward to this morning and following what was a decidedly dovish hike, a sharp rally across the Gilt curve has seen 10y Gilts fall to 1.259% (-8.3bps) and 2y Gilts to 0.399% (-7.8bps). Sterling (-1.40%) also suffered its biggest one-day fall since early June and is now over 4% off the September highs. That in turn helped the FTSE 100 to a +0.90% return. We’ll have more on the BoE further down but arguably the more important news for global markets yesterday was that from across the pond.

The first was the hotly anticipated House draft tax bill. As expected it included a corporate tax rate cut from 35% to 20%. The WSJ noted that this will also be permanent with no set expiry date. Existing offshore cash piles will betaxed at 12% which is a higher rate than any proposed by Republicans in the past year according to the FT. The plan didn’t make any significant changes to 410(k) retirement plans and won’t include changes to the Affordable Care Act’s individual mandate to purchase health insurance. Mortgage-interest deductions on new home sales would be capped at $500k compared to $1m currently for couples. Elsewhere, businesses can immediately write off the full cost of new equipment for five years and University endowment income will also to be taxed for large endowments.

So it appears that the bill had the minimum that the market expected but also that there wasn’t a huge amount to get excited about. Unsurprisingly there are plenty of question marks about it passing in its current form. The US Chamber of Commerce and National Federation of Independent Business have both criticised it for small businesses while Democratic minority leader Chuck Schumer said that the plan “exacerbates the unfairness and inequality in our tax code”.

The initial reaction in markets was for equities to sell off, the USD weaken and Treasury yields fall. However those moves were mostly reversed by the end of play as investors parsed through the details. By the close the S&P 500 was up +0.02% after being down as much as -0.50%. A big contributor to the initial weakness was a near 4% plunge for homebuilders with the mortgage-interest deduction news although like the broader index that sector did manage to recover pretty much completely into the close. The Dow closed +0.35% and Nasdaq -0.02% while the small cap Russell 2000 index finished +0.25%. The USD index also closed -0.14% after being down about -0.40%  while 10y Treasury yields finished at 2.345% (-2.7bp) after trading as low as 2.334%.

In terms of the next steps, mark-ups to the bill are expected to start as soon as Monday in the House as Republican leaders begin the task of convincing others to support the bill. The unveiling of the proposed legislation in full is expected in a vote in the House of Representatives next week. Finally, President Trump reiterated his expectation that the tax bill will become law by Christmas. Late last night we also got official confirmation that Jerome Powell will be the next Fed Chair, a decision which appeared to be well flagged in the last couple of weeks. In our economists’ report last week they argued that a Powell-led Fed makes most sense. They highlight that Powell would provide the highest degree of continuity to current policy and as such the market should take the announcement largely in stride, keeping financial conditions easy and providing little disruption to an economy that is experiencing solid growth. In addition, the team also highlight that Powell has now had five years’ experience working inside the Fed, and by all reports very effectively on both macroeconomics/monetary policy and on regulatory policy. Evidence from speeches also suggest that Powell would prove to be a more than capable communicator.

Finally, on a much more micro front, after the bell last night, Apple’s share price rose over 3% in extended trading after the company guided to a higher than expected sales forecast for the upcoming December quarter, in part as the company ramp up production for the iPhone X, so your wait time for it should reduce! Elsewhere, Time Warner fell 3.75% yesterday after the WSJ reported that the US Department of Justice is considering blocking its sale to AT&T.

So as the market continues to absorb all of the newsflow in the last 24 hours you could almost be forgiven for forgetting that we’ve got another payrolls Friday to worry about today. In terms of what to expect, the consensus is running at 310k for payrolls which as a reminder follows that hurricane-impacted -33k print back in September. If the consensus proved to be spot on then that will actually be the biggest monthly reading in two years. Our US economists are slightly below market, albeit at a still solid 250k. They note that there is however still a considerable amount of uncertainty around this expectation. Post Hurricane Katrina, which exhibited a similar plunge in job growth in the September 2005 print, it took until November 2005 for job growth to return to its earlier trend. Indeed it’s worth noting that the range of street expectations is anywhere from 120k to 400k so the street is a bit all over the place as to what to expect. As always keep an eye on other components of the report including average hourly earnings (+0.2% mom expected).

This morning in Asia markets are ending the week a bit mixed. The Hang Seng (+0.30%) and ASX 200 (+0.48%) are up modestly while the Kospi (-0.10%) and Shanghai Comp. (-0.74%) are down as we type. Meanwhile, the Nikkei is closed today for the annual Culture day and US equity futures are a tad higher. In other news, Venezuela President Nicolas Maduro has announced plans for a restructure and refinance of the country’s roughly $100bn debt in an address to the nation.

Moving on. Prior to the BoE yesterday we received the final October manufacturing PMIs in Europe. There was little in the way of any last minute surprises however with the Eurozone reading revised down a very modest 0.1pts to 58.5. That compares to 58.1 in September and is the highest reading since February 2011. The biggest revision at the country level was in France (56.1 versus 56.7 flash) however that reading means that it is flat versus September. The same can be said for Germany (60.6 versus 60.5 flash) while in the periphery the most notable upside surprise came in Italy (57.8 vs. 56.5 expected) which rose 1.5pts from the month prior and to an 80-month high. Spain (55.8 vs. 54.8 expected) was also a full point above expectations and touched a 29-month high.

Staying in Europe, Germany’s October unemployment rate was in line at 5.6% and remained at its post reunification low, while the UK’s October construction PMI was above expectations at 50.8 (vs. 48.5 expected).Across the 

pond, in the US, the 3Q nonfarm productivity was above expectations at 3.0% qoq (vs. 2.6% expected) - the largest increase in three years - and lifted through-year growth to 1.5% yoy. The 3Q unit labour cost also slightly beat at 0.5% qoq (vs. 0.4% expected). Elsewhere, the weekly initial jobless claims (229k vs. 235k expected) and continuing claims (1,884k vs. 1,894k expected) prints were broadly in line.

Before we look at the day ahead, Brexit newsflow took a bit of a backseat yesterday but it’s still worth noting the comments from Brexit Secretary David Davis yesterday. He noted that he has spoken to Guy Verhofstadt (EU Parliament negotiator) about pulling together an ‘associate citizenship’ which in theory would allow visa free working rights. Such a deal would be in relation to a transitional arrangement.

Looking at the day ahead, we’ve got a busy end to the week for data. The highlight is this afternoon with the October employment report in the US including that latest monthly nonfarm payrolls print. Away from that we’ve got the UK’s remaining October PMIs and the ISM non-manufacturing, final durable and capital goods orders for September, factory orders for September and the final PMIs in the US. Away from the data, the Fed’s Kashkari will also speak in the afternoon and the ECB’s Coeure in the evening. President Trump is also due to depart on his 11-day trip to Asia.