All Eyes On Payrolls, But The Real Story Is The Ongoing EM Rout

While US equities surged on Thursday, reversing a nearly 400 point drop in Dow Jones after several reports predicted that today's US-China trade talks were going well would have a successful conclusion, hours ago the Mnuchin-led delegation departed Beijing having accomplished nothing. So far, however, this has had no impact on US equity futures (it has hit the Chinese Yuan however), which are hugging the flatline, while Asian stocks dropped and Europe edged higher ahead of the April payroll report due shortly (full preview here).

Europe's Stoxx 600 Index was modestly in the green ahead of US payrolls data, with the outperforming bourse the SMI (+0.6%). The CAC (-0.1%) underperforming due to disappointing results from Société Générale (-6.9%). This  alongside further financial misses for HSBC (-3%) and BNP Paribas (-2.7%) is dragging on the financial sector, currently down -0.4%. Basic materials and technology companies offset the financial weakness and led gains in the Stoxx Europe 600 index as the euro slipped amid mounting concern about the region’s economic outlook.

Stocks from Sydney to Hong Kong retreated earlier.

Meanwhile, the dollar initially slumped only to bounce back sharply ahead of today's main event, the nonfarm payrolls report due at 830am EDT. Bloomberg’s Dollar Spot Index rose 0.1%, after slipping 0.1% in Asia; the dollar is set to strengthen versus all of its G-10 peers this week, and is heading for a third week of gains.

The euro slipped after economic data from the region continued to disappoint, while the pound stayed above 200-DMA support against the greenback amid discussions within the U.K. government about the need to extend the Brexit transition period. The Japanese yen was the only currency to edge higher versus the dollar on Friday; The Japanese yen was the only currency to edge higher versus the dollar on Friday as Japan remained closed for a holiday, with local Treasury trading shut.

The key overnight news was the lack of news after the 2-day trade talks in China, where the US asked China to narrow trade surplus by USD 200bln by 2020 to halt its subsidies in manufacturing plan; this was revealed in a document issued to China in advance of trade talks this week. This comes as well as Chinese officials believing that the US trade delegations proposals were unfair. The US trade delegation has now left Beijing.

How will the USD react to today's payroll print: "Given the fears of higher inflation and what that means for the Fed, it will be the hourly earnings data that will determine financial market reaction,” said Derek Halpenny, European head of global markets research at MUFG. “But, with equity markets so fragile, it is not clear how the dollar would respond to a strong wage print."

However, while payrolls will come and go, the big story remains the recent surge in the dollar and the accelerating rout in Emerging Markets, where a bevy of currencies, including the TRY, ZAR, INR, IDR and especially the Argentina Peso most recently, have all gotten crushed, in many cases sliding to all time lows, prompting some to ask if another 1997-style EM crisis is on the horizon.

The biggest - and most important - wildcard remains Turkey, where inflation is soaring yet where dictator president Erdogan has made it very clear any rate hikes will be severely frowned upon. Meanwhile, the country's FX crisis, which has seen the lira plunge to all time lows...

... is now starting to spread to Egypt.

It's not just FX however, as Emerging Market Bond markets are now also getting crushed, with the EMB tumbling to a level not seen since the Chinese post-deval crisis in late 2015. A few more point of decline here, and we will have big problems.

There was no instability in U.S. Treasuries, whose yields dropped modestly overnight, trading in a tight range between 2.93% and 2.95%, and Gartman is just 1 basis point away from being stopped out.

In commodities, oil is taking a breather from its recent bull run, with WTI (-0.2%) and Brent (-0.2%) off recent highs. Price action has been supported by the looming geological risk from possible new US sanctions against Iran. Iran’s foreign minister said yesterday that US’s demand to change its 2015 nuclear agreement was unacceptable as the May 12th deadline set by US President Trump approaches. Looking ahead, the weekly Baker Hughes rig count  will take focus later in the session.

In the latest Brexit news, Ireland reportedly has the support of EU leaders to veto Brexit trade agreement and collapse discussions next month if PM May fails to push through a customs agreement which averts a hard border for Northern Ireland. Furthermore, reports added that EU officials warned that negotiations on future partnership will be suspended at European summit next month until there is a solution to the customs issue. Ministers were told during a briefing earlier this week that UK may not be able to leave customs union for another 5 years as it may take that long to prepare the technology required to operate the border.

In geopolitical developments, President Trump was said to order the Pentagon to consider a reduction in the number of US troops in South Korea, while there were also reports from South Korean press that North Korea agreed to fully denuclearize by 2020.

Looking at the day ahead, in the US the April employment report will be due. The Fed's Quarles, Dudley, Williams, Bostic, George and Kaplan are all due to speak. Berkshire Hathaway, Alibaba, HSBC, BNP Paribas and Societe Generale are due to report earnings.

Bulletin Headline Summary from RanSquawk

  • Cautious trade seen ahead to key US NFP data
  • US trade delegation leaves Beijing with no take-aways
  • Looking ahead, highlights include US jobs and Fed’s Quarles, Dudley, Williams, Bostic, George and Kaplan speaking

Market Snapshot

  • S&P 500 futures down 0.2% to 2,627.75
  • STOXX Europe 600 up 0.3% to 385.62
  • MXAP down 0.4% to 172.36
  • MXAPJ down 0.7% to 559.60
  • Nikkei down 0.2% to 22,472.78
  • Topix down 0.2% to 1,771.52
  • Hang Seng Index down 1.3% to 29,926.50
  • Shanghai Composite down 0.3% to 3,091.03
  • Sensex down 0.5% to 34,934.03
  • Australia S&P/ASX 200 down 0.6% to 6,062.89
  • Kospi down 1% to 2,461.38
  • German 10Y yield rose 0.4 bps to 0.536%
  • Euro down 0.2% to $1.1967
  • Brent Futures down 0.3% to $73.39/bbl
  • Italian 10Y yield fell 5.0 bps to 1.485%
  • Spanish 10Y yield fell 0.4 bps to 1.25%
  • Brent Futures down 0.3% to $73.42/bbl
  • Gold spot down 0.2% to $1,309.28
  • U.S. Dollar Index up 0.2% to 92.55

Top Overnight News from Bloomberg

  • The odds of a deal between the U.S. and China reduced -- the U.S. delegation, led by Treasury Secretary Steven Mnuchin, asked China to decrease the trade deficit by at least $200 billion by the end of 2020 compared with 2018, according to a document seen by Bloomberg News that was sent ahead of the trade talks in Beijing
  • Donald Trump seems set on pulling out of the Iran nuclear deal next week, with U.S. officials suggesting that any initial diplomatic turbulence will be followed by negotiations for a new accord
  • The Brexit transition period will need to be extended potentially for years because any new customs regime will not be ready to come into force in time, according to senior British officials; In local council elections, Britain’s main political parties benefited from the collapse of the U.K. Independence Party, but results saw Jeremy Corbyn’s Labour continue to struggle outside London
  • President Mauricio Macri of Argentina is starting to try the patience of global investors. More than two years into his efforts to revive South America’s second- largest economy, his government is suddenly being tested by an abrupt decline in the peso
  • Bank of England will refrain from raising rates next week but is still set to start normalizing policy, according to the National Institute of Economic and Social Research
  • RBA sees slightly higher core inflation and unemployment in 2018 as it edged up core inflation and unemployment forecasts for 2018 and reaffirmed that tighter policy will be needed “at some point”
  • Barclays, which stood firm last week as banks tore up their outlooks, has joined the exodus after the purchasing managers index showed the sector failed to “rebound convincingly” last month
  • HSBC’s new Chief Executive Officer John Flint announced a $2b share buyback to placate investors as he works to bolster growth
  • The euro-area economy looks set for further weakness in May after private-sector activity slowed for a third month in April, further adding doubts on the ECB’s plan to end its stimulus program

Asia stocks traded with a subdued tone following a yo-yo session in US where stocks finished mostly negative although well off worst levels, while the absence of Japan and looming US NFP jobs data added to the lacklustre tone. ASX 200 (-0.5%) was negative with the index dragged by financials and most commodity-related sectors, while KOSPI (-0.7%) also traded downbeat as index heavyweight Samsung Electronics slumped on its re-open from a 50-to-1 stock split. Elsewhere, Shanghai Comp. (-0.1%) and Hang Seng (-0.3%) conformed to the gloom following another liquidity drain by the PBoC and amid IPO activity in which Ping An Insurance unit Good Doctor failed to set-off fireworks on its debut, however mainland losses were stemmed amid encouraging Caixin Composite and Services PMI data. PBoC injected CNY 20bln via 7-day reverse repos for a net weekly drain of CNY 110bln

Top Asian News

  • Samsung Electronics’ Post-Split Comeback Drags Korea Equities
  • There’s a Bond ETF Boom in Taiwan, Thanks to Life Insurers

European equities tracking higher ahead of US NFP data later on in the day, with the outperforming bourse the SMI (+0.6%). The CAC (-0.1%) underperforming due to disappointing results from Société Générale (-6.9%). This alongside further financial misses for HSBC (-3%) and BNP Paribas (-2.7%) is dragging on the financial sector, currently down -0.4%. Some encouragement found in BASF (+1.1%), as well as EDF (+0.8%), whom announced the largest energy acquisition of the year.

Top European News

  • Euro-Area Economy Heads for More Weakness After April Slowdown
  • Corbyn Has Little to Celebrate in Britain’s Local Elections
  • Constancio: Unconventional Tools Should Be Used Whenever Needed

In FX, the dollar remains relatively firm overall, and especially against EM currencies that continue to collapse (ie Lira slumping to fresh record lows vs the Greenback near 4.2600). However, the DXY is still consolidating off recent peaks set before the FOMC (new 2018 high around 92.800), with bulls perhaps wary about getting too carried away after hawkish Fed expectations were somewhat overdone, or at least undone by the shift to a symmetrical inflation target. Technically, the aforementioned new ytd best forms nearest resistance, while there is little of note on the downside ahead of 92.000. JPY: A marginal outperformer within the G10 basket and pulling back further from highs just above 110.00 to test bids/buying interest at 109.00 and briefly below overnight, but with trading volumes still impacted by the lack of Japanese participants. Decent 108.75-85 option expiry interest (1 bn) could come into play on a weak US jobs report or bad news on the US-China trade talks front. AUD/NZD: The tussle down under rages on, and the Aud is stretching its legs having overtaken the Kiwi late yesterday with the cross staging a firmer rebound above 1.0700 and Eur/Usd down through 1.5900 in wake of firmer than forecast Chinese Caixin PMIs, rather than anything fresh or Aud supportive from the RBA’s SOMP. Meanwhile, Nzd/Usd is looking precarious again close to 0.7000. CHF/GBP/EUR/CAD: All softer vs the Dollar after Usd/Chf dabbled with parity again on Thursday, while Cable is testing reported bidding interest between 1.3550-20 again and only a few pips off the 200 DMA (1.3539) on more negative Brexit impulses and another UK GDP downgrade. Eur/Usd capped by its 200 DMA (1.2015-20) and a 1.2000 expiry, but still looking ‘comfortably’ supported ahead of a major Fib (1.1936) and the 2018 base (1.1916). Usd/Cad remains bid circa 1.2800 and toppy near 1.2900, but the Loonie is still suffering to an extent after yesterday’s trade data revealed a record deficit – IVEY PMI due later

In commodities, oil is taking a breather from its recent bull run, with WTI (-0.2%) and Brent (-0.2%) off recent highs. Price action has been supported by the looming geological risk from possible new US sanctions against Iran. Iran’s foreign minister said yesterday that US’s demand to change its 2015 nuclear agreement was unacceptable as the May 12th deadline set by US President Trump approaches. Looking ahead, the weekly Baker Hughes rig count (1800BST/1200CDT) will take focus later in the session. Moving onto metals, gold (-0.1%) prices have steadied ahead of key US jobs data due later today. In terms of base metals, copper has seen modest gains, while the red metal also weathered an early wobble seen in Dalian iron ore futures which slipped 2% at the open during the 1st day foreign investors were permitted to trade Chinese iron futures. Elsewhere, London base metal prices rose today, led by the rise in aluminium, climbing as much as 1.9% having fallen 2.3% in the previous session.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 192,000, prior 103,000;
    • Change in Private Payrolls, est. 190,000, prior 102,000
    • Change in Manufact. Payrolls, est. 20,000, prior 22,00
  • Unemployment Rate, est. 4.0%, prior 4.1%; Underemployment Rate, prior 8.0%
  • Average Hourly Earnings MoM, est. 0.2%, prior 0.3%; YoY, est. 2.7%, prior 2.7%
  • Average Weekly Hours All Employees, est. 34.5, prior 34.5
  • Labor Force Participation Rate, est. 62.9%, prior 62.9%

DB's Jim Reid concludes the overnight wrap

Today we’ll learn more about the state of the US labour market with special attention focused at the moment on earnings. As of this morning the market consensus for the payrolls print is 192k. As a reminder this follows that much lower than expected 103k reading in March and the bumper 326k reading in February. Random number generation at its finest. Our US economists have a 185k forecast for this afternoon and expect payrolls to rebound from last month’s weather distorted data, especially as the construction sector experienced the largest drop since April 2007 last time out. Given all the talk in markets is about US inflation and wages at the moment, arguably the more significant aspect of today’s report will be the average hourly earnings number. The consensus for that is +0.2% mom which would keep the annual rate at +2.7% yoy. Our colleagues expect a slightly stronger +0.3% mom to send a broadly consistent signal to the stronger ECI data last week (which hit a post crisis high). If this expectation is correct, our economists’ estimate would actually push the annual rate up to +2.8% yoy and just below the hurricane-induced spike in September 2017 that set the high water mark for this recovery. The other important data to watch is the unemployment rate which is expected to fall to 4.0% after remaining stuck at 4.1% for the last six months, the longest streak with a stable unemployment rate since the late 1960s. Our economists note that four percent unemployment could be an important development, as they have previously noted that the wage Phillips curve tends to steepen around this level, suggesting that further unemployment declines will begin to exert increasing upside pressure on wages. Anyway, that data is due at 1.30pm BST this afternoon.

Ahead of this there were a lot of mildly negative news around yesterday which compounded up to create a decent slug of global risk off that peaked just before Europe went home. At this point the S&P 500 traded down -1.56%. However from there stronger tech stocks and White House economist Mark Calabria’s comments on US-China trade talks being “fairly positive” so far seemed to help the S&P recover and to close at -0.23%, while the Dow also recovered c400pts to end higher for the day (+0.02%).

Knocking sentiment earlier, we had Euro CPI sharply lower, some downplaying rhetoric from China and the US about the chances of success at their trade summits, Tesla and AIG falling -8.6% and -9.6% respectively after results, the ISM non-manufacturing a bit weaker, the US bank index trading down to c5 month lows as yields fell, and Argentina dragging down EM with a 300bps hike to go with the same seen last week.

There was a similar mini-roller coaster ride over in government bonds, the yield on 10y Bunds initially increased a couple of bps early in the session to 0.589%, but dropped as much as -6.6bp following the softer than expected CPI print (more below), ending the day at 0.528% (-4.9bp). Elsewhere, yields on UST 10y (-2bp) and OATs (-4.2bp) were also lower while Gilts fell -7bp after a weaker than expected rebound in the services sector PMI.

The Argentinian story was fascinating. Their central bank hiked rates 300bps to 33.25% only 6 days after the same sized move, as the bank took the action to “guarantee the process of disinflation and is ready to act again if necessary”. The Peso dropped -5.6% vs. the Greenback yesterday (-20.2% YTD), while yields on its 10y bond (USD) jumped 30.7bp to 7.535%. Remember it was only around a year ago that Argentina did a 100 year bond. This traded down -1.94 to a cash price of 85.697 during the day. One to keep an eye on.

This morning in Asia, markets are trading lower with the Kospi (-0.64%), Hang Seng (-0.35%) and Shanghai Comp. (-0.12%) all modestly down while Japanese markets are closed for holidays. In Beijing, Treasury Secretary Mnuchin said the US and China are having a “very good conversation” ahead of the today’s meetings. Datawise, China’s April Caixin composite PMI edged up 0.5pt mom to 52.3 while the services PMI was also better than expected at 52.9 (vs. 52.3).

Now recapping other markets performance from yesterday. The US dollar index weakened for the first time in four days (-0.11%) while the Euro rose +0.31% and Sterling ended broadly flat. European bourses were all lower, weighed down by the stronger Euro and softer than expected corporate results. Across the region, the Stoxx 600 (-0.73%), DAX (-0.88%) and FTSE (-0.54%) were all softer. WTI oil firmed +0.74% to $68.43/bbl following further tensions between US and Iran.

Away from the markets, the European Commission has kept its latest forecasts for 2018 and 2019 GDP growth unchanged at 2.3% and 2% respectively. In terms of the recent softening in economic indicators, the ECB’s Praet noted that “temporary factors may also be at work. We will also need to monitor whether…these developments reflect a more durable softening in demand”. He also reiterated that inflation developments remain subdued and an ample degree of monetary stimulus remains necessary. Elsewhere, the ECB’s Hansson seemed relatively upbeat and sees “moderate wage growth pressure” that will ultimately allow the bank to exit QE.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was mixed. The April ISM nonmanufacturing index fell 2pts mom to a four month low (56.8 vs. 58 expected) but  still consistent with US growth being above trend. In the details, the activity index fell 1.5pts to 59.1 but the new export orders index jumped 2.5pts to a 12-month high of 61.5. The March trade deficit narrowed to a six month low (-$49bln vs. -$50bln expected) as growth in exports outpaced imports. Elsewhere, the 1Q nonfarm productivity came in below market at 0.7% (vs. 0.9% expected) while the March factory orders was above expectations at 1.6% mom (vs. 1.4%). In labour markets, the weekly initial jobless (211k vs. 225k expected) & continuing claims (1,756k vs. 1,835k expected) were both lower than expectations, with the former hovering near its 48 year low. Lastly, the final reading for April Markit composite and service PMI was revised up 0.1-0.2ppt to 54.9 and 54.6 respectively, while the core capital goods orders was revised down by 0.3ppt to -0.4% mom. Following the above, the Atlanta Fed’s GDPNow estimate for Q2 GDP growth is now at 4.0% saar.

The Eurozone’s April core CPI was weaker than expected at 0.7% yoy (vs 0.9%) and fell 0.3ppt mom. Our European economists believe this mainly reflects the impact of Easter timing on services prices (core goods inflation rose a tenth to 0.3% yoy), so they expect core inflation to rebound to around 1.0% yoy in May. Elsewhere, the March PPI was in line at 2.1% yoy. In the UK, the April Markit services PMI (52.8 vs. 53.5 expected) and composite PMI (53.2 vs. 53.7 expected) were both softer than expected as it continues to show the weaker momentum trend of late.

Looking at the day ahead, in the US the April employment report will be due. In Europe the final April services and composite PMIs will be released, while France's March trade balance and the Euro area's March retail sales data will also be out. The Fed's Dudley and ECB’s Constancio are due to speak. Berkshire Hathaway, Alibaba, HSBC, BNP Paribas and Societe Generale are due to report earnings.