After a barrage of breaking, surprise headlines and geopolitical developments, markets fall back to the familiar rhythm of trading the monthly payrolls (+205K exp), or rather, the far more important average hourly earnings (+2.8% Y/Y exp.) report. This morning, global shares hit a one-week high before easing a touch, as caution ahead of jobs data, and a potential disappointment in wage inflation outweighed a potential breakthrough in nuclear tensions over the Korean peninsula.
As a result, futures are somewhat mixed, with Asia trading higher, while Europe started off on the back foot but has recovered losses. The MSCI All-Country World index was 0.1% higher and set for a weekly gain of almost 2%.
As is traditionally the case ahead of payrolls, S&P futures have hugged the flatline.
Gains came mostly from Asian stocks which staged sharp rallies after U.S. President Donald Trump said he was prepared to meet North Korea’s Kim Jong Un, potentially marking a major breakthrough in nuclear tensions between the two countries. The summit news overshadowed a warning from China that it will take “strong” measures to counter U.S. trade tariffs.
“While it is easy to be cynical, one can’t help feeling these talks could well go the same way as previous attempts. But nonetheless it will be interesting to see how this one plays out,” said Michael Hewson, chief markets analyst at CMC Markets.
Commenting on Trump's two main announcement this week, one desk had the following interestinh commentary:
President Trump must be delighted that his policies are paying off. His bellicose tweets have brought North Korea to the negotiating table and his use of cold war steel tariffs is effectively an invitation for trading partners to make him their best offer in order to secured tariff exemption. A weaker dollar is clearly part of Trump's protectionist agenda as well and we believe investors will be looking to sell into any near-term dollar rallies.
As previewed, the market now will focus onto today's employment report in the US. The consensus is for a 205k February payrolls number, which follows 200k in January. The unemployment rate is expected to dip to 4.0% from 4.1%. But it’s the average hourly earnings print which is the bigger component focus for the market right now given the obsession with inflation. The market forecasts a +0.2% mom print (which should lower than annual rate by one-tenth to +2.8% yoy, driven by base effects).
Going into payrolls, Asian stocks were higher across the board after the lead from US where Trump confirmed aluminium and steel tariffs, but exempted NAFTA partners and was also said to be open to providing relief for allies. In addition, Asia-Pac risk appetite was further bolstered by geopolitical developments in which the South Korean National Security Office chief announced that North Korean Leader Kim is committed to denuclearization and will refrain from conducting further tests, with President Trump and North Korea's Kim to meet by May.
Overnight, in its latest announcement, the BoJ kept monetary policy unchanged as expected with NIRP held at -0.1% and 10yr JGB yield target at around 0%. The decision was made by 8-1 vote with board member Kataoka the sold dissenter, who called for the BoJ to buy JGBs so 10yr yields or longer drop further and repeated that the BoJ should clarify it will ease further if domestic factors delay reaching price target. At the post-meeting press conference, Governor Kuroda faced a barrage of questions about the so-called exit from the current monetary easing scheme, but according to Goldman, the governor damped expectations for the exit for the foreseeable future. In fact, Goldman adds, and we agree, that it will be difficult for the BOJ to normalize interest rates before the impact of the next consumption tax hike, slated for October 2019, has run its course, given the weakness of upward pricing pressures and the strong intentions of the government.
Australia's ASX 200 (+0.3%) and Nikkei 225 (+0.5%) were positive but with upside capped by a subdued commodities sector and weakness across steel names on Trump tariffs, while KOSPI (+1.0%) outperformed on the further appeasement in the Korean peninsula. Not helping the growth narrative was China's CPI which came in blistering hot, surging 2.9%, or the most in 5 years. Elsewhere, Hang Seng (+1.1%) was underpinned amid the broad positivity in the region, while the Shanghai Composite (+0.6%) somewhat lagged after PBoC inaction led to a net weekly drain of CNY 240bln.
Also overnight, outgoing PBOC Governor Zhou Xiaochuan said market-access reforms should be accelerated and that the world’s second-largest economy “can be bolder in opening up”; Deputy Governor Yi Gang said stable progress will be made on capital-account convertibility.
Other key Chinese data:
Chinese commodities were hit hard by the jump in inflation and trade war announcement, with iron ore plunging 5%, now down 14% from February peak; steel rebar futures -7.8% this week in Shanghai, on course for biggest slump in a year.
European equities erased earlier losses before edging higher, chasing gains in the U.S. and Asia as the U.S. non-farm payrolls report draws near. Automakers remain underperformers as trade-related concerns linger. The Stoxx Europe 600 Index was fractionally higher (+0.1%) and heading for a weekly advance of 2.6%. GVC Holdings is one of the best performers on the gauge after the company said it made a strong start to 2018. Lagardere drags media shares to the worst industry group performance after posting weaker-than-expected full-year results. German Jan. ind. production fell 0.1% m/m; est. +0.6% m/m. U.K. February retail sales drop as BDO sees more ‘casualties.’
In global macro, the overnight narrative was dominated by the yen and the Norwegian krone, with the USDJPY jumping after Trump agreed to meet Kim Jong Un in an unprecedented summit; meanwhile, Norway’s headline inflation print beat every single estimate and came in higher than the central bank’s newly reduced target, providing fodder to krone bulls. The EUR/USD dropped below 1.2300, while MXN and CAD among the strongest major currencies after Mexico and Canada’s tariff exemption. Asia’s emerging currencies were mixed as concern over U.S. metals tariffs and possible retaliation from other nations was offset by news of the first ever meeting between the leaders of the U.S. and North Korea.
Meanwhile, few investors sought the safety of Treasuries ahead of February’s non-farm payrolls data. Treasury yields rise across the curve, led by 7Y-10Y sector. Core euro-area bonds extend losses as traders build concession ahead of large supply next week.
In the commodities complex, WTI and Brent crude futures remain in close proximity to yesterday’s lows with energy newsflow relatively light ahead of today’s Baker Hughes rig count. In metals markets, spot gold remains modestly softer after yesterday’s sell-off with prices suffering from an apparent easing in geopolitical tensions. Chinese steel futures were pushed to their lowest level since November as domestic producers call on the Chinese government to increase its efforts in retaliating to Trump’s tariff plans whilst sentiment also hampered for copper prices which were seen at their lowest level since September 2017.
Expected data include non-farm payrolls, unemployment and wholesale inventories. Big Lots and American Woodmark are among companies reporting earnings. The Fed’s Evans (1.40pm, 3.45pm and 5.45pm GMT) and Rosengren (5.40pm GMT) are both expected to speak on monetary policy and the outlook following the report so that’s worth also keeping an eye on.
Top Overnight News
Asian stocks were higher across the board after the positive lead from US where on one hand President Trump confirmed aluminium and steel tariffs, but exempted NAFTA partners and was also said to be open to providing relief for allies. In addition, Asia-Pac risk appetite was further bolstered by geopolitical developments in which the South Korean National Security Office chief announced that North Korean Leader Kim is committed to denuclearization and will refrain from conducting further tests, with President Trump and North Korea's Kim to meet by May. ASX 200 (+0.3%) and Nikkei 225 (+0.5%) were positive but with upside capped by a subdued commodities sector and weakness across steel names on Trump tariffs, while KOSPI (+1.0%) outperformed on the further appeasement in the Korean peninsula. Elsewhere, Hang Seng (+1.1%) was underpinned amid the broad positivity in the region, while Shanghai Comp. (+0.6%) somewhat lagged after PBoC inaction led to a net weekly drain of CNY 240bln, while participants also digested US tariffs alongside mixed Chinese lending and inflation data. Finally, 10yr JGBs were flat with markets focused on riskier assets and after an uneventful BoJ announcement. The PBoC skipped open market operations for a net weekly drain of CNY 240bln vs. last week's CNY 120bln net injection.
Overnight, outgoing PBoC Governor Zhou said China's economy will be less reliant on quantitative stimulus and that China may reduce reliance on money supply to boost growth. Responding to Trump's tariffs, China Mofcom said it firmly opposes US trade measures and urged the US to withdraw tariffs on steel and aluminium, while it added it will take strong measures to safeguard its own interests.
Other Chinese data:
The BoJ kept monetary policy unchanged as expected with NIRP held at -0.1% and 10yr JGB yield target at around 0%. The decision was made by 8-1 vote with board member Kataoka the dissenter, who called for the BoJ to buy JGBs so 10yr yields or longer drop further and repeated that the BoJ should clarify it will ease further if domestic factors delay reaching price target.
Top Asian News
European bourses have seen a tame start to the session as is often the case during pre-NFP trade (Eurostoxx 50 -0.2%) with EU stocks not joining in on the gains seen overnight that came amid potential reprieve for US allies on the tariff front and a de-escalation of geopolitical tensions. Sector specific performance has been relatively broad-based thus far with some slight underperformance in material names following price action seen overnight in the metals complex. In terms of individual movers, GVC (+3.1%) leads the Stoxx 600 following their latest earnings report with Lagardere the laggard (-6.4%) after their earnings statement was met with a cold reception by the market.
Top European News
In FX, USD majors are broadly split down the middle as the safer-havens underperform on latest US-NK developments and further signs that President Trump is willing to approach import tariffs on a country by country basis. Usd/Jpy has now broken free from its recent 106.00 anchor to the upside, above 106.50 and through the 20 DMA around 106.75-80, but could be contained by hefty option expiries within a new 106.50-107.00 range (1.2 bn and 3.8 bn respectively), with the upper end not just more alluring due to the size of interest at the strike, but also perhaps compelling if US jobs data is strong (wages especially). Usd/Chf is testing 0.9500, while Eur/Usd is trading either side of the 1.2300 handle and remaining lower after Thursday’s sharp reversal from initial postECB/Draghi presser peaks. In terms of tech analysis, 1.2334 seems to be capping the upside (21 DMA), while support is seen down at 1.2245 and there is also big expiry interest in close proximity with 1.8 bn running off at 1.2300 and 2.3 bn at 1.2350. The Loonie is amongst the G10 outperformers and back below 1.2900 vs the Greenback after Canada (and Mexico) got an indefinite exemption from steel and aluminium taxes pending NAFTA negotiations. However, today’s employment report offers plenty of scope for independent impetus and there are some decent option expiries that could come into play around 1.2815-25 (1.1 bn) and 1.3000 (1.6 bn). Elsewhere, Eur/Nok dropped (to sub-9.600) on stronger than expected Norwegian inflation data, with headline CPI above the new 2% target level just ahead of next week's policy meeting. Looking at the Dollar Index, yesterday’s close above the 21 DMA at 89.820 bodes well for further recovery gains and a breach of the topside from the current circa 90.100-300 range.
In commodities, WTI and Brent crude futures remain in close proximity to yesterday’s lows with energy newsflow
relatively light ahead of today’s Baker Hughes rig count. In metals markets, spot gold remains modestly softer after yesterday’s sell-off with prices suffering from an apparent easing in geopolitical tensions. Chinese steel futures were pushed to their lowest level since November as domestic producers call on the Chinese government to increase its efforts in retaliating to Trump’s tariff plans whilst sentiment also hampered for copper prices which were seen at their lowest level since September 2017
US Event Calendar
DB's Jim Reid concludes the overnight wrap
I spent the last night before holidays at a big DB macro dinner with most people fixated about rates, inflation, and risks to the dollar weakness view. The risks to growth due to a China slowdown did come up a few times as well which it hadn’t as much at previous similar events I’ve been at. Usually at these dinners there tends to be quite consensual themes running through the core of it. However there didn’t seem to be high conviction last night. It’s seems a combination of the vol shock, the subsequent recovery, confusion about whether yields have peaked for now and Trump’s tariff plan have left conviction low.
Before the dinner, Deutsche Bank held its 8th annual Global Bank Capital Forum in London. Every year, it brings together major investors, issuers and senior regulators to discuss the latest market and regulatory developments in banking. This year, the event was attended by 120 investors and 70 representatives of banks from Europe, North America and APAC. The keynote address was delivered by William Coen, Secretary General of the Basel Committee on Banking Supervision, and the closing speech was given by Stanley Fischer, Vice Chairman of the Federal Reserve in 2014-2017.
Moving on to today, it’s the 9th anniversary of the closing low for the S&P 500 from the GFC. How time flies. In the PDF today we show our usual performance review chart for this period. There’s also some accompanying text further down the page to mark this occasion. Today is also payrolls day and in particular we’ll get the next instalment of the averagely hourly earnings saga that last month created mayhem in financial markets (full preview below). Ahead of that we’ve just had news of the BoJ policy meeting where members voted 8-1 to keep its yield curve settings and asset purchases unchanged while the statement reiterated that inflation expectations have been “more or less unchanged”. We shall hopefully learn more from Governor Kuroda’s press conference at 3:30pm local time which is just before our note goes to print.
The other big news this morning - that could lead to lower geopolitical risks - is that the US and North Korean leaders may meet for the first time after the South Korean National Security Council Chief Chung Eui-yong said North Korean leader Kim Jong Un “expressed his eagerness to meet President Trump as soon as possible”, while Trump said he would meet Kim “by May to achieve permanent denuclearization” by the North. In Asia, markets have pared back larger gains but remain higher with the Nikkei (+0.48%), Kospi (+0.92%), Hang Seng (+0.87%) and China’s CSI 300 (+0.55%) all up. Elsewhere, China’s departing PBOC Governor Zhou noted that “when we’re pursuing quality-oriented (economic) growth, we’ll depend less heavily on the credit-base growth model”. Datawise, China’s February CPI was above market at 2.9% yoy (vs. 2.5% expected) while the PPI moderated further to 3.7% yoy (vs. 3.8% expected).
The BoJ this morning follows a market moving ECB meeting yesterday where hawkish language was spun dovishly by Draghi in the press conference leading to a big round trip for the Euro and Government bonds. In terms of language, the most significant development yesterday was the ECB dropping the pledge to increase the asset purchase programme if needed following the policy meeting. Specifically the March statement removed the sentence “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration”. While a change to the easing guidance was expected, the complete removal rather than toning down or change in reaction function was a bit more of a surprise to markets.
To be fair the press conference wasn’t hugely eventful but markets reacted in a way which suggested a more dovish Draghi. When questioned on the dropping of the pledge to increase stimulus Draghi said that it was long overdue (a way of perhaps downplaying the language) and also unanimous across the council. He confirmed that the removal reflects the fact that stimulus is an “unlikely contingency now” and emphasised the improved economic backdrop now compared to 2016 when guidance was initially tinkered. Away from that, there wasn’t much change in staff economic forecasts. For growth, GDP was revised up one-tenth to 2.4% for 2018 and left unchanged in 2019 and 2020 at 1.9% and 1.7% respectively. For inflation, CPI was left unchanged in 2018 at 1.4%, revised down one-tenth in 2019 to 1.4% and left unchanged in 2020 at 1.7%. Unsurprisingly the recent escalation in tariffs and protectionist rhetoric was bought up with Draghi saying that “we are convinced that disputes should be discussed and resolved in a multilateral framework and unilateral decisions are dangerous”. He also confirmed that the ECB would assess the response of the exchange rate on the tariff discussion”.
The price action through the press conference is a little challenging to explain but clearly Draghi’s words and tone had a massive impact on changing the interpretation of the hawkish initial announcement. Indeed euro and bond yields first rose while equities sold-off however by the time Draghi was finished speaking much of those moves had fully reversed, before accelerating further in that direction into the European close. By the end of play, the euro had weakened -0.80% with a post meeting high to low range between 1.2298 and 1.2446. 10y Bunds finished 2.8bps lower at 0.625% with a post ECB range between 0.6236% and 0.700%. The ranges on BTPs and Spanish Bonds were 9bps and 8bps respectively. That weaker euro helped the likes of the Stoxx 600 and DAX to +1.05% and +0.90% respectively, as it gained from being broadly unchanged before Draghi spoke.
In the US the S&P 500 fluctuated before ending +0.45% higher and Treasuries -2.6bps lower to 2.858%. Overnight, President Trump has signed a proclamation authorising a levy of 25% duty on imported steel and 10% on aluminium, with the tariffs to take effect in 15 days. He has also warned of more “reciprocal taxes” on imports from countries that charge higher duties on US goods. That said, the market seemed to have taken some comfort that Canada and Mexico is exempt from the tariffs due to their status as key regional allies and Trump’s comments of “…we’re going to be very flexible” and that “I’ll have a right to (go) up or down (on the level of tariffs) depending on the country and I’ll have a right to drop out or add countries...” In terms of initial reactions, House Speak Ryan noted “I disagree with this action and fear its unintended consequences” while Senator Flake noted the so-called flexible tariffs are a marriage of two lethal poisons to economic growth – protectionism and uncertainty.
So with the central banks now out of the way the market divert its focus onto this afternoon’s employment report in the US. The consensus is for a 205k February payrolls number, which follows 200k in January. Our economists are slightly below the market at 185k, which they still expect will be enough to drive down the unemployment rate to 4.0% from 4.1% (market also expects a 4.0% reading). Arguably it’s the average hourly earnings print which is the bigger component focus for the market right now given the obsession with inflation. Both the market and our economists forecast a +0.2% mom print (which should lower than annual rate by one-tenth to +2.8% yoy, driven by base effects). Keep an eye on the data due out at 1.30pm GMT. The Fed’s Evans (1.40pm, 3.45pm and 5.45pm GMT) and Rosengren (5.40pm GMT) are both expected to speak on monetary policy and the outlook following the report so that’s worth also keeping an eye on.
Finally onto Brexit. The EU Council President Tusk noted that “if in London someone assumes that the negotiations will deal with other issues first, before moving to the Irish (border) issue, my response would be – Ireland first”. DB’s Oliver Harvey believes that this is a negative and if agreement on Ireland has to happen before transition then the chance of getting to a transition deal this month are low. Notably, unnamed UK officials told Bloomberg that they now don’t expect a full Brexit deal by the end of the year.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the weekly initial jobless claims rose from last weeks’ 48 year low and was higher than expected at 231k (vs. 220k), while continuing claims was below market (1,870k vs. 1,919k expected). Elsewhere, a Fed report showed US household debt jumped 5.2% in 4Q, the fastest pace of this expansion while net worth rose $2.1trn to $98.7trn. Over in Europe, Germany’s January factory orders fell more than expected at -3.9% mom (vs. -1.8% expected) but annual growth was still solid at 8.2% yoy (vs 11.5% expected). The February Bank of France industry sentiment index was slightly above at 105 (vs. 104 expected) while the UK’s February RICS survey noted respondents had on net seen no change in home prices over the past three months and there was little expectation of change over the next three months.
Looking at the day ahead, January trade data in Germany will be due along with January industrial production reports for Germany, France and the UK. In the US, the aforementioned February employment report will be out. Following that report, the Fed’s Rosengren and Evans will speak as mentioned earlier.