Morning Briefing – Hope and horror on NFP Day

<p>It’s Non-Farm Payrolls (NFP) Day. Nobody expects traders to talk or read about much else until well after 1.30pm London time, when the data will be released.</p>

  • It’s Non-Farm Payrolls Day. Nobody expects traders to talk or read about much else until well after 1.30pm London time, when the data will be released. So let’s run through the main focus points for the June data. But be sure to read the excellent NFP primer by my colleague City Index Chief Technical Strategist, James Chen. If you have already, you’ll know consensus has settled on a 175,000 addition to the payrolls. The expectation was somewhat backed by ADP’s unofficial curtain raiser on Thursday, where payrolls rose 172,000. A solid advance by the employment component of ISM‘s Non-Manufacturing (AKA services sector) data dump a day before also helps. Either way, the market is looking for the figures to completely negate the ‘WTF’ 38,000 outcome in May, the lowest monthly tally for at least five years. James Chen writes in his preview that a figure around the average forecast or slightly above would be read as ‘moderately bullish’ by the market, whilst a number below 160,000 would be bearish, with the extent dependant on how much below the threshold the data are.   The other two major components of the Employment Situation report:


  • Unemployment rate seen rising to 4.8% from 4.7%
  • Average hourly earnings expected to gain 0.2% (as per last several months)


  • Ahead of Friday’s main event, markets are doing their usual pre-NFP dance of parries, advances, fake-outs and retreats. The main overnight action was in the kiwi, which jumped as much as 275 pips, after the governor of New Zealand’s RBNZ central bank said further rate cuts could put financial stability at risk. The Aussie took a break for a while but had rebounded to rise 27 points as I wrote this. The preeminent ‘pre-payrolls market’ though is of course the yen. After a 2.6% stride so far this week against the dollar—which it was threatening to extend at the time of writing—Japan’s currency stands to tumble if the US jobs figure comes out anywhere as strong as expected. Seasoned market participants will know that the path to that decline will be a crazy one, with much volatility. Yen options demand is customarily elevated anyway ahead of the non-farms. Throw Brexit into the mix, and it’s no surprise to see implied volatility in USD/JPY 1-month at-the-money trades just 1.65 vol. points below their highest levels so far this year, in February. This suggests some ‘interesting’ cross-market action after the data release, whichever way the data go.
  • Stocks kind of appropriately, have struggled for direction in the meantime. A global darkening of the economic outlook has brought one of the worst weeks for risky assets for months, whilst US Treasury yields are anchored close to this week’s record lows. Deepening trouble in Europe’s bank sector, British consumer confidence taking its most severe hit in five years, according to a special report from Gfk, post-Brexit, and the continuing fall-out from the referendum vote itself—this week most visible in the UK property sector—have taken a heavy toll. If other City offices are anything like ours right now, we should also factor in market participants struggling to make sense of events being televised live from Dallas. There, five police officers were shot dead overnight during rallies in the wake of the fatal shooting of two black men this week.
  • The FTSE was reacting more in line with the overall tone, trading down 0.1%, though it’s had a better week than most major indices. The benchmark has lost less than a percentage point so far in total. The DAX is getting a boost after China reported an increase in vehicle sales last month, lifting the likes of DaimlerChrysler, BMW, and VW, and helping Germany’s main index rise 1%, reducing the week’s slide to 2.8%.
  • Nikkei extended its slump this week by another 0.9%, whilst sterling remained not a great deal better off than its worst levels this week at $1.28 (actually its worst for three decades) rising 0.3% to $1.2953. Euro ditto against the dollar, a few ticks higher on the day to $1.1067; annual lows from January of $1.07 in sight. More interestingly, euro/sterling was still toying with the closely watched 85 pence level, as traders watch to see whether the rate will re-enter its long-term channel to correct a parabolic post-Brexit advance.


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