Week Ahead: Nonfarm payrolls, China PMIs and Eurozone inflation on tap
Welcome to your guide to the week ahead in the markets. China trade talks are ushered in by PMI data, Eurozone inflation results and US nonfarm payroll reports.
US nonfarm payrolls
The set-piece US labour market report on Friday is the main eco event for market watchers. Signs of a slowdown in employment growth are showing, supporting the doves’ case for further rate cuts. Will we see stronger wage growth though? The NFP report missed expectations on the headline number with employers adding just 130k last month versus the 160k expected.
China data ahead of trade talks
The week gets a kickstart with more economic data from China likely to give more clues about the impact of the trade war. The official manufacturing and services PMIs will be followed by the closely-watched private Caixin manufacturing survey in the early hours of Monday.
The European Central Bank has cut rates, so what now? Inflation has proved stubbornly weak in the Eurozone, with headline inflation in August of just 1%, while core inflation was a meagre 0.9%. Market expectations for inflation remain subdued. There seems little hope that inflation will start to tick higher and give the ECB some breathing space. Euro area CPI preliminary readings will be delivered on Tuesday morning.
MPs are back to business, but we don’t know where this leaves the only thing that matters for sterling right now – will there be a deal or not? GBP pairs will remain exposed to headline risk as the market tries to figure out which way the wind is blowing.
The Reserve Bank of Australia is expected to cut interest rates again when it convenes on Tuesday. Speaking last week, governor Philip Lowe gave a very strong signal that rates would be cut again from the current record low 1%.
There are several corporate data releases this week, here are the main ones to put in your diary.
|Oct 1st||Ferguson||FY 19 Full Year Results|
|Oct 1st||Greggs||Q3 Trading Update|
|Oct 2nd||Tesco||Interim Results|
|Oct 3rd||Pepsico||Q3 Earnings|
|Oct 3rd||Ted Baker||Interim Results|
|Oct 3rd||H&M Group||Q3 Results|
Coming Up on XRay
Don’t miss our upcoming video streams on XRay. You can watch them live directly through the platform or catch-up afterwards when it suits you.
|07.15 GMT||Sept 30th||European Morning Call|
|15.00 GMT||Sept 30th||Charmer Trading talks Forex|
|15.45 GMT||Oct 1st||Asset of the Day: Oil Outlook|
|19.00 GMT||Oct 1st||Live Trader Training|
|18.00 GMT||Oct 3rd||The Stop Hunter’s Guide to Technical Analysis (part 5)|
|12.30 GMT||Oct 4th||LIVE Nonfarm Payrolls Coverage|
Key Economic Events
There’s a lot of data coming out in the next few days, particularly at the start of the week.
|01.00 GMT||Sept 30th||China Manufacturing and Services PMIs|
|01.00 GMT||Sept 30th||ANZ Business Confidence|
|01.45 GMT||Sept 30th||China Caixin PMI|
|08.30 GMT||Sept 30th||UK Final QoQ GDP|
|12.00 GMT||Sept 30th||Germany CPI Inflation YoY|
|03.30 GMT||Oct 1st||RBA Interest Rate Decision and Statement|
|08.30 GMT||Oct 1st||UK Manufacturing PMI|
|09.00 GMT||Oct 1st||Eurozone Preliminary CPI|
|14.00 GMT||Oct 1st||US ISM Manufacturing PMI|
|12.15 GMT||Oct 2nd||US ADP Nonfarm Employment|
|14.30 GMT||Oct 2nd||US Crude Oil Inventories|
|08.30 GMT||Oct 3rd||UK Services PMI|
|12.30 GMT||Oct 4th||US Nonfarm Payrolls|
NFP beat dampens rate cut bets, but not by enough
This afternoon’s US non-farm payrolls report was even more closely watched than usual. It is common for traders to get twitchy ahead of arguably the most important monthly data release on the economic calendar, but this was different.
Markets are betting that the US Federal Reserve will cut interest rates when it meets again at the end of this month. Pricing suggests multiple 25 basis point cuts over the coming 12 months.
The Federal Open Market Committee hasn’t exactly been on the same page as the markets for some time, and the latest jobs numbers given strong ammunition with which to defend their hawkishness. Economists expected to see a 165,000 increase from today’s payrolls, after May’s dire reading of 75,000, but in fact the US economy added 224,000 jobs during June.
A slight tick higher in the participation rate saw the unemployment rate inch up to 3.7%, against expectations of no change at 3.6%.
Wage growth, key inflation predictor, slowed to 0.2% month-on-month, and 3.1% year-on-year. In both cases the readings were 10 basis points lower than analysts had expected.
Market reaction to non-farm payrolls
Stock futures tumbled, with the Dow quickly shedding 180 points and the S&P 500 dropping 0.8% following the announcement as markets cut bets on easier Fed policy. US ten-year treasury yields gained six basis points in the space of 10 minutes to trade back above 2%. EUR/USD fell 0.6%, breaking through three levels of support to hit 1.1222, while GBP/USD dropped 0.7% to test 1.2500.
The latest non-farm payrolls have highlighted the disconnect between market expectations for monetary policy and what the economy is signalling is needed. It’s true that growth is beginning to slow, and some data has revealed weakness in areas such as manufacturing, but so far the market is expecting a disproportionate response from US policymakers.
Markets expect three rate cuts between now and April 2020, although bets of four are not far behind. There are no expectations of interest rates remaining in the current 2.25-2.50% range – wise, considering the data and global macroeconomic conditions – while a handful of uber doves have gone as far as pricing in seven cuts by April 2020.
Those expectations are likely to cool in the wake of the latest NFP data, but the market is still convinced that the Fed is about to embark on a rapid cycle of loosening policy. It will take a lot more than one better-than-expected data print before we reach a realistic middleground.
Payrolls day: eyes on wage inflation
Data this week from the US has offered some mixed signals. Employment via the ADP private payrolls number was strong, coming at 275k, well ahead of expectations. One cannot always see a direct correlation between the ADP print and the NFP number, but nonetheless it suggests another print at least in line with the 3-month average. Census hiring might skew the numbers to the upside – prepare for a 250k+ print this time as a result, which could cause a little volatility.
Meanwhile the Chicago and ISM PMIs were soft, coming in around their weakest in two years and suggesting some drag in some employment sectors.
Within the ISM numbers the Employment Index fell to 52.4%, a decrease of 5.1 percentage points from the March reading of 57.5%. The Chicago PMI also highlighted weaker employment, with the decline in demand and production matched by reduced demand for labour. The Employment Indicator fell to its lowest level since October 2017, and below the three- and 12-month averages.
PCE figures meanwhile, shows spending accelerated at the fastest pace in almost ten years, rising to 0.9% in March after a 0.1% gain in February. Personal incomes, rose 0.1% in March. Inflation fell to 1.6% from 2%. All told there is perhaps a sense that wages are not squeezing higher as much as expected.
Unemployment shows tightness
On unemployment, initial jobless claims were steady at a seasonally adjusted 230,000 for the week ended April 27th, after jumping 37k the week before, the biggest rise in two years. The four-month moving average of claims has inched up 6,500 to 212,500.
Last month marked a recovery in the headline number as the March figure climbed to 196k from the wobble in February. Wage growth however was much softer than expected, rising 0.1% MoM versus the 0.3% expected. This left annual average wage growth at 3.2%, short of the 3.4% expected which was printed the prior month.
Post-FOMC, the USD is firmer with a push off the 96 handle back towards the 98 handle. For a drive higher for USD we would like require a beat on wage growth more than anything else as big headline jobs number is easy to disregard month to month. In fact it’s hard to get quite as excited about the main NFP print these days, particularly as the numbers can be quite volatile month to month. Focus on the three-month average and the wage data. Also unemployment, should it fall further and highlight further tightening in the labour market will get the Fed’s attention.
GBPUSD is holding the 1.30 handle but a big number on wages may pressure the pair lower and a retreat to the 200-day line around 1.2960.
190k jobs created