D-Day for Non-Farm Payroll

Friday May 5: Five things the markets are talking about

April’s non-farm payrolls report is due out this morning at 08.30 am EST, and consensus is looking for +185k new jobs and the unemployment rate to stay atop of +4.5%.

Any print above the +150k benchmark will be considered good enough for the Fed to hike rates soon, but anything below and investors will be worrying that the U.S economy is officially losing “steam.”

Aside from today’s NFP print, there are a plethora of Fed speakers doing the rounds. Fed Chair Janet Yellen will speak in at 1:30 pm EST and top brass San Francisco Fed President Williams, St. Louis Fed President Bullard and Fed Vice-Chair Fisher are all due to speak this afternoon and expect them to provide a good deal of clarity on Wednesday’s FOMC statement.

Elsewhere, a slump in commodity prices has triggered a rally in safe-haven bonds, the yen and gold.

1. Global equities see red

Equity markets are on the back foot in the overnight session, leading the cause are Chinese shares, which completed its longest losing streak this year as regulators try to curb leverage and speculation.

In China, the blue-chip CSI300 index fell -0.6%, while the Shanghai Composite Index dropped -0.8% overnight – fresh three-month lows and their fourth weekly loss in a row.

Down-under, the Aussie S&P/ASX 200 Index lost -0.7%, falling for a fourth straight day, pressured by weaker commodity prices.

In Europe, indices are trading off the session lows, but lower across the board with the exception of the FTSE100, which is taking its queue from a weaker session in Asia being led lower on commodity price concerns.

U.S stocks are expected to open little changed (+0.1%).

Indices: Stoxx50 -0.3% at 3616, FTSE +0.1% at 7255, DAX -0.3% at 12606, CAC-40 -0.2% at 5362, IBEX-35 -0.2% at 10995, FTSE MIB -0.2% at 21122, SMI -0.3% at 8953, S&P 500 Futures +0.1%

2. Oil prices plummet, gold in demand

In the overnight session, oil prices have plunged to new five-month lows on the back of OPEC and other producers appearing to rule out deeper supply cuts to reduce the world’s persistent glut of crude.

Brent crude futures are at +$47.88 per barrel, down -50c or -1% from Thursdays close. Prices fell to as low as +$46.64, the lowest since Nov. 30, while U.S West Texas Intermediate (WTI) crude oil futures are trading at +$44.92 per barrel, down -60c or -1.3%, after a more than -4% drop yesterday.

Note: WTI futures are below levels when OPEC and other producers agreed cuts late last November.

The market seems to agree that these steep price falls will likely force OPEC members to extend production cuts later this month, however, for the “crude bulls” the prospect of deeper cuts continue to appear relatively slim.

Gold (+0.5% to +$1,233.10 per ounce) is up on a safe-haven bid, but is on track for its worst week in six-months. On Thursday, the yellow metal printed its seven-week of +$1,225.20 an ounce.

Oil was not the only commodity that suffered. Chinese iron ore futures fell -7% after tumbling -8% yesterday on concerns that global commodity demand may fall sharply in the face of record supplies.

3. Global yields under pressure despite the overnight demand

Despite the overnight safe haven Asian demand, U.S Treasuries are under broad selling pressure, which has U.S 10’s yields rallying to the highest in more than three-weeks (+2.36% vs. +2.31% on Wednesday).

Factors hurting the bond market include the follow-through of selling driven by the Fed’s statement Wednesday leaving the door ajar for a rate hike next month, yesterday’s report showing unit labor costs jumping by +3.0% in 1Q, a sign of inflation, and finally, the selloff in German bunds on a Emmanuel Macron win in this weekends second round French Presidential vote.

Currently, Fed fund futures are pricing in a +76% probability of a hike next month.

4. The ‘big’ dollar finds some support, but EUR has legs

Ahead of the U.S open, the EUR (€1.0952) has slipped lower outright, after earlier reaching a six-month high of €1.0992 when it stalled ahead of the psychological handle of €1.10.

However, a market favorable outcome in this weekend’s French presidential election, in the form of victory for centrist Emmanuel Macron over far-right candidate Marine Le Pen, is likely to boost the ‘single unit.’ But, don’t be surprised if the EUR gains are relatively limited since a Macron victory is widely expected.

Europe’s single unit has garnered support this week on the back stronger regional data and on speculation that the ECB will begin reducing monetary stimulus sooner rather than later.

If this morning’s NFP headline prints a below-forecast reading it’s likely to see the €1.10 handle easily penetrated.

Elsewhere, sterling (£1.2937) is back above the psychological £1.29 level and recovering from losses from earlier in the week. The pound is benefiting from U.K local elections that suggest PM May’s Conservative Party are on course for a sweeping victory at the upcoming Jun 8th Parliamentary election.

5. RBA’s Quarterly Monetary Policy statement

The Aussie central bank’s latest policy statement overnight will be a challenge for the AUD ‘bears’ (A$0.7393).

The statement erred on the optimistic side with increased confidence in its base case for a return to +3% growth. It also anticipated edging down of unemployment and a view of modestly higher inflation. Fixed income dealers have not been pricing their yield curve as optimistically as the central bank’s rhetoric.

However, it did reiterate their view that an appreciating AUD currency would complicate the economy’s transition.

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