Expect Whiplash Price Action Ahead of NFP

Thursday September 01: Five things the markets are talking about

Data yesterday saw the U.S economy add other +177k private sector jobs last month, proof that job creation remains strong, with most industries and companies of all sizes adding solidly to their payrolls.

What does it means for Friday’s non-farm payrolls report and the Fed’s September meeting?

The message from Jackson Hole last week was that the Fed is very keen to raise rates. Investors are going to have to seriously consider the possibility of a September hike if tomorrows headline surprises to the upside.

If the payroll numbers happens to be strong (+185k), September will immediately become a ‘live’ meeting, if so, dealers should expect a “wobble” in risk markets.

Be forewarned, over the past five years, the August payrolls figure has missed expectations each time. A miss tomorrow would be entirely consistent with recent trends. So either way, good or bad print, we should be expecting some unexplained prices moves amongst the various asset classes due to positions.

1. Global bourses mixed results

It’s no surprise to see Asian indexes again trading mixed overnight ahead of tomorrow’s payrolls and potential Fed rate hike implications.

In Europe its a different story as Euro bourses have got an early lift as PMI data from China to the U.K. beat forecasts, prompting optimism about the global economy.

The Stoxx Europe 600 Index is heading for its highest level in three months, extending its gains after this morning’s post-Brexit report revealed that U.K. factory activity reached a ten-month high last month – expect the pounds -12% slide helped with the headline.

Bank stocks continue to be one of the outperforming sectors, adding to their biggest three-day gains since July. Automakers climbed the most in almost a month, and miners rebounded after the manufacturing data.

Indices: Stoxx50 +0.9% at 3,050, FTSE +0.3% at 6,802, DAX +0.6% at 10,622, CAC-40 +1.07% at 4,485, IBEX-35 +1.34% at 8,833, FTSE MIB +1.34% at 17,169, SMI +0.3% at 8,232, S&P 500 Futures +0.3%

2. Commodities tread water after plunge

Crude oil prices, which posted robust gains last month, are trading relatively unchanged ahead of the U.S open, one day after falling on renewed fears of a supply glut. Yesterday’s EIA report saw a +2.3m build vs. +1.1m expected.

Brent crude is up +0.4% to +$47.08 per barrel, after falling -2.8% yesterday. The benchmark is up a very healthy +11% on the month. West Texas crude has rallied +0.5% overnight to +$44.92 after shedding -3.6% on Wednesday. The contract still gained more than +7% for the month.

Investors will now focus on what happens to the “big” dollar after tomorrow’s non-farm payroll (NFP). Then it’s onto the oil producer watch for short-term directional play. OPEC is due to meet in Algeria on the sidelines of the International Energy Forum (IEF) on Sept. 26-28, and are expected to seek to revive a global output freeze deal.

Spot gold continues to trade atop of its two-month lows, slipping -0.1% to $1,307.80 an ounce.

3. Yields remain unphased

U.S Treasuries remain stuck in a narrow range as investors wait for U.S payrolls. U.S 10’s yield is at +1.580% vs. +1.570% Wednesday.

A widely held thought on the street is that the Fed will raise rates just once this year and wait until after the U.S election to do so. Dealers now see a +24% chance that the Fed will raise rates at its September meeting and a +57% chance of an increase by December.

However, expect tomorrow’s employment report to change opinions very quickly if it is much stronger or weaker than expected. If payrolls happens to surprise to the upside (+185k), investors should expect a significant rise in short-term yields to pave the way for a rate hike possibility next month.

4. What post-Brexit blues?

Sterling is the big mover this morning. It has jumped across the board after the U.K’s PMI rose to a ten-month high last month. Manufacturing activity came in well above forecasts at 53.3 vs. July’s 48.3. The market had expected the reading to remain below the 50 levels, which signifies contraction.

For now, this morning’s strong reading eases concerns about the recent referendum vote to leave the EU having a harsh impact on the U.K. economy.

GBP has jumped almost +1% to hit a one-month high of €0.8403 against the EUR. Against the dollar GBP has gained a cent to hit a six-day high £1.3251. Currently, the yield on the 10-year gilt is up roughly +0.06% at +0.597%.

5. Nothing to stop the ‘buck’

Sterling aside, the dollar continues to garner support ahead of the U.S open as dealers anticipate another solid payroll print tomorrow that will strengthen expectations for a near-term Fed rate increase.

One of the problem trades already highlighted this week (long yen positions) continues to feel the squeeze as USD/JPY rallies to a one-month high of ¥103.62.

EUR/USD remains under rate differential pressure, falling another -0.3%, to trade atop of its three-week outright low of €1.1123.

The Fed’s “data-dependent” stance has left investors narrowly focused on the monthly figures and reason why there is so much emphasis on the granddaddy of economic indicators – non-farm payroll (NFP).

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