In a session where bleary-eyed traders followed the all-night tragic developments out of Dallas and initially sold off risk assets, it is good to see that some normalcy prevailed with the traditional post Europe-open futures ramp, which was further assisted by the successful resolution of the Dallas standoff, which has pushed futures modestly higher ahead of today’s main event for markets, the June payrolls report due in under two hours.
“European markets have done well to open on the green,” said Michael Ingram, a strategist at BGC Partners in London. “Still, feeble volumes belie a real lack of conviction ahead of the U.S. non-farms. I am not sure the NFPs will help to put the market on a more stable footing, as a solid number will put a Fed hike back on the agenda. Ideally, equity markets would like to see evidence of robust growth and somnolent central banks.”
As discussed last night, the payrolls report – especially if a significant outlier to the consensus print of +180,000 – could sway expectations for the timing of the Fed’s next interest-rate hike. Officials at the central bank flagged concern over job creation at their last meeting, which followed data showing employers in May took on the fewest workers since 2010, casting doubts on prospects for a rate increase this year.
The Stoxx Europe 600 Index rose 0.2% in early trading, rebounding for the 2nd straight day, after dropping 2.9% this week. Europe saw some further relief when Italy’s Banco Popolare rallied 7% after saying its own stress tests showed “resilience” to adverse shocks. Banca Popolare dell’Emilia Romagna SC climbed 5%, and Monte Paschi added 3% after reaching a record low despite a 3-month long short selling ban imposed by the Italian regulator. The lender’s chief executive officer said it’s working “intensely” with authorities to quickly resolve its bad-loan burden. European automakers climbed as China’s car sales grew faster in the first half of the year.
S&P 500 futures added 0.2% after being modestly lower overnight. In the U.S., Juno Therapeutics Inc. sank 27 percent in early New York trading after saying that three patients died during its clinical trial for a cancer therapy and that the U.S. Food and Drug Administration has placed the study on hold.
Treasuries headed for a seventh weekly gain as the U.K.’s vote to leave the EU threatens to slow economic growth and drives investors to the relative safety of bonds. Gains in U.S. jobs and wages won’t be enough to get the Fed to move anytime soon as policy makers assess what’s happening in the global economy, PIMCO’s Mark Kiesel told Bloomberg. German bunds also headed for a seventh weekly gain, the longest run since January 2015. Italian bonds gained on Friday, with the yield on the securities falling two basis points to 1.22 percent.
As noted, the only notable macro event on today’s calendar will be the June jobs report, where consensus expects an increase of 180,000 workers following last month’s appalling 38,000 print.
Market Snapshot
- S&P 500 futures up 0.2% to 2096
- Stoxx 600 up 0.5% to 324
- FTSE 100 down 0.1% to 6527
- DAX up 0.9% to 9501
- German 10Yr yield up less than 1bp to -0.17%
- Italian 10Yr yield down 3bps to 1.21%
- Spanish 10Yr yield down 2bps to 1.16%
- S&P GSCI Index up 0.3% to 356.3
- MSCI Asia Pacific down 0.6% to 128
- Nikkei 225 down 1.1% to 15107
- Hang Seng down 0.7% to 20564
- Shanghai Composite down 1% to 2988
- S&P/ASX 200 up less than 0.1% to 5231
- US 10-yr yield up less than 1bp to 1.39%
- Dollar Index down 0.14% to 96.19
- WTI Crude futures up 0.5% to $45.36
- Brent Futures up 0.5% to $46.64
- Gold spot down 0.3% to $1,356
- Silver spot up less than 0.1% to $19.70
Top Global News:
- Theranos CEO Holmes banned from operating a lab for 2 years
- U.K. consumer sentiment dives most since 1994 on Brexit effect
- China said to consider aid package for struggling state firms
- U.K. Consumer Sentiment Dives Most Since 1994 on Brexit Effect
- North Korea Calls U.S. Sanctions on Kim a ‘Declaration of War’
- Brazil Targets Moderate Improvement in 2017 Budget Deficit
Looking at regional markets, as customary we start in Asia where stocks traded mostly lower with caution seen following the weak lead from the US where energy losses dampened sentiment, while participants also await key NFP data. Nikkei 225 (-1.1%) was initially led higher by auto names, but then pared gains as the cautious tone weighed on risk appetite, while the ASX 200 (+0.1%) saw choppy price action. Sentiment in China was soured following a mammoth net weekly drain of CNY 645b1n by the PBoC resulting in losses in the Shanghai Comp (-1.0%) and the Hang Seng (-0.7%). 10-yr JGBs traded higher amid cautious sentiment with 2yr and 10yr bond yields continuing to print fresh record lows, while the BoJ also entered the market for JPY 1.14tIn worth of government debt. PBoC set the CNY mid-point at 6.6853 (Prey. mid-point 6.6820).PBoC injected CNY 20bIn with 7-day reverse repos for a net weekly drain of CNY 645b1n vs. last week’s net injection of CNY 180bIn.
Top Asian News
- Xi Boosts Party Say in China’s $18 Trillion State Company Sector: Party should “strengthen and improve’ control,” Chinese president says
- China Auto Sales Growth Accelerates on Rising SUV Demand: Passenger-vehicle sales rose 19% to 1.7m units in June
- Brexit Means Even Mickey Mouse’s Yen Bonds Have Negative Yields: Number of yen company yields below 0% up 10x after Brexit
- McDonald’s Said to Narrow Bidders for $2 Billion China Franchise: Fast-food chain invites Cinda, Sanyuan to make binding offers
- Top China Fund Manager Puts Half of His Cash Pile Back in Stocks: HSBC Jintrust’s Qiu buys low-valuation shares in rally bet
Since the European open, equities have been bid with the Euro Stoxx (+0.5%) modestly in the green, while newsflow has been relatively light ahead of the US NFP report. However, equities have pulled off best levels in recent trade. This morning the FTSE MIB has notably outperformed amid the move higher in Italian banks, in particular Banco Popolare (+7.8%) whose internal stress test reaffirmed resilience to adverse shocks. Elsewhere, in credit markets the upside in equities has subsequently led to some slight softness in safer assets while yields across the German curve are relatively unchanged as participants wait on the side-lines ahead of the aforementioned US jobs report.
Top European News
- Deutsche Boerse Said to Push Frankfurt Clearing in LSE Pitch: CEO Kengeter to pitch deal as city’s shot at euro clearing. European officials want to win London business post-Brexit
- Post-Brexit Wreckage Spawns M&A Bargain Hunters, Pound Evacuees: Clients are asking bankers to scour the FTSE for deals. ‘The money is there’ for deals like Melrose’s Nortek purchase
- U.K. Leadership Fight Pits Seasoned May Against Untested Leadsom: Gove eliminated from shortlist in final vote among lawmakers. Cameron’s successor as premier will be announced on Sept. 9
- Worst June in a Decade as U.K. Retailers Experience Brexit Chill: Consumer confidence falls most since 1994 after Brexit vote. Retailers could see more pain following vote to leave EU
- Airbus Is Running Out of Buyers for Its Enormous A380s: Orders for the superjumbo are drying up as airlines shift to more efficient planes.
- Air France-KLM CFO Plans His Departure as New CEO Arrives: Riolacci to leave as airline faces off with pilots over costs. CFO to stay until November before joining site manager ISS
- EU Commission Seeks Sanction on Spain, Portugal on Deficits: Finance ministers to decide whether to go ahead with sanctions. Fines could be reduced, canceled on exceptional circumstances
In FX, the Bloomberg Dollar Spot Index slipped 0.1 percent, trimming this
week’s advance to 0.5 percent. The pound strengthened 0.2 percent. The kiwi strengthened 0.3 percent versus the greenback and reached a 14-month high against Australia’s dollar. It jumped 1.4 percent in the last session after comments from New Zealand central bank Deputy Governor Grant Spencer crushed expectations that interest rates will be cut anytime soon, boosting the attraction of the highest-yielding Group of 10 currency. The odds of the nation’s borrowing costs being reduced next month dropped to 42 percent on Friday from as much as 70 percent earlier in the week, derivatives show. The MSCI Emerging Markets Currency Index was little changed on Friday leaving it down 0.8 percent in the week. China’s yuan headed for a fifth weekly decline, depreciating 0.4 percent, in the longest run of losses this year amid speculation the central bank favors further depreciation to revive the economy.
In commodities, oil trimmed its biggest weekly decline in five months as investors weighed the largest drop in U.S. output since 2013 against a smaller-than-expected crude stockpile decline. West Texas Intermediate crude rose 0.5 percent to $45.37 a barrel, paring the weekly drop to 7.4 percent. Brent rose 0.5 percent to $46.61. Gold was poised for its first back-to-back daily drop since the U.K. voted to leave the EU as investors turned their focus to the U.S. jobs report. Bullion for immediate delivery fell 0.3 percent to $1,355.95 an ounce and silver slipped 0.2 percent. Copper rose 0.4 percent to $4,706.50 a metric ton, paring its biggest weekly decline in two months amid concern about flagging demand and a a surge in inventories around the world. Aluminum gained 0.5 percent and zinc added 0.3 percent.
Corn advanced 1.8 percent to $3.48 a bushel, extending its rebound after entering a bear market on July 5. Brazil slashed its estimate for domestic output after drought and frost hurt the crop. Palm oil is poised to enter a bear market, dragged down by concerns over rising supply and lower prices of alternatives. The benchmark futures contract on Bursa Malaysia Derivatives in Kuala Lumpur has dropped 19 percent from this year’s closing high of 2,779 ringgit reached on March 29.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities trade higher despite the looming US NFP report with newsflow relatively muted at this stage of the session
- FX markets have traded in a relatively tentative manner with USD/JPY inside 100.00-101.00 and EUR/USD between 1.1050-1.1100
- Looking ahead, highlights include US NFP report, Canadian Jobs report and DBRS sovereign update on the UK
- Treasuries slightly lower on front-end during overnight trading while oil and global equities mostly higher, gold drops; payroll report today at 8:30am ET, forecast for +180k.
- Pacific Investment Management Co. says the Federal Reserve will keep interest rates on hold no matter what employment report shows
- The pound headed for a third week of declines spurred by the Brexit vote, winning itself the title of 2016’s worst performer among major currencies
- U.K. retailers had their worst June in a decade as consumers reined in spending ahead of the country’s European Union referendum, according to figures from accounting firm BDO
- U.K. banks’ exposure to the country’s commercial real estate sector is more than 65 billion pounds ($84 billion), almost a third of the combined market value of the biggest lenders
- State intervention to support Italian banks can’t be ruled out, given the risk that current difficulties may undermine trust in the nation’s financial industry, said Bank of Italy Governor Ignazio Visco
- China is considering providing about 10 of its state-owned enterprises with an aid package, people familiar with the matter said. Sinosteel Corp. is among those that may receive help, one of the people said
- Wall Street’s answer to a growing pool of negative-yielding bonds worldwide: stripping U.S. Treasuries. The outstanding amount of Treasury notes and bonds split into principal- and interest-only securities jumped to $223.1 billion in June, the highest level in more than 17 years
- Five Dallas police officers were killed and six others were wounded by snipers on Thursday night during a demonstration protesting shootings by officers in Minnesota and Louisiana this week
US Event Calendar
- 8:30am: Change in Non-farm Payrolls, June., est. 180k (prior 38k)
- Change in Private Payrolls, June, est. 170k (prior 25k)
- Change in Manufacturing Payrolls, June, est. -3k (prior -10k)
- Unemployment Rate, June, est. 4.8% (prior 4.7%)
- Average Hourly Earnings m/m, June, est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, June, est. 2.7% (prior 2.5%)
- Average Weekly Hours All Employees, June, est. 34.4 (prior 34.4)
- Change in Household Employment, June (prior 26)
- Labor Force Participation Rate, June (prior 62.6%)
- Underemployment Rate, June (prior 9.7%)
- 3:00pm: Consumer Credit, May, est. $16b (prior $13.416b)
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DB’s Jim Reid concludes the overnight wrap
So here we go again. Another payroll Friday is upon us and one which would have been a long awaited event had Brexit not intervened. It’s still important as it was only last month (it seems a lifetime ago) that we saw the shock 38k print relative to 160k expectations. The Verizon strike was an issue but not anywhere near large enough to explain the scale of the miss. Today DB’s Joe LaVorgna expects around 35k Verizon workers to be back in the number with his forecast at 155k (consensus 180k). However Joe makes the point that a number at his forecast (with no revisions) would have the effect of reducing the three-month moving average to 105k from 116k previously. This is significantly lower than the trend over the past couple of years, as nonfarm payroll gains averaged 251k in 2014 and 229k in 2015. The big question would be whether this means full employment is approaching and higher wages are round the corner or whether it reflects companies scaling down hiring as profit margins get squeezed? We have more sympathy with the latter view given we think we’re late cycle.
As a prelude to the data today, yesterday’s ADP employment change report came in a little better than expected at 172k (vs. 160k expected) which is a little bit more than the downwardly revised 168k last month (although as we know severely overstated the actual private payrolls number). Initial jobless claims (254k vs. 269k expected) continue to remain supportive too with the four-week average of 265k now the lowest since April. So all eyes on this afternoon’s print. For completeness the market is also expecting the unemployment to rise one-tenth to 4.8% (DB +4.9%) and average hourly earnings to have risen +0.2% mom (DB +0.2%) which would have the effect of raising the YoY rate to +2.7%.
Markets still appear to be fighting for any real direction in the aftermath of Brexit. Indeed after European equities initially declined in the two days post Brexit, a four-day rally was then followed with three days of heavy declines at the start of this week. Yesterday we were back to rebound mode though with the Stoxx 600 (+1.05%), DAX (+0.49%) and Euro Stoxx Banks (+0.56%) all up. The FTSE 100 and 250 finished +1.09% and +1.46% too while Sterling, which initially pushed back above 1.30 midway through the afternoon, eased off in the US session to close near unchanged and just above 1.290. UK banks and asset managers bounced back. RBS (+6.51%), Lloyds (+4.52%) and Barclays (+2.35%) all rose despite the news that S&P had revised down UK bank ratings’ outlooks. Meanwhile Schroders (+5.32%), L&G (+2.63%) and Aviva (+1.84%) all outperformed too.
It was a slightly different story in the US however. After initially starting on the front foot, the S&P 500 moved steadily lower as the session wore on before a late bounce into the close helped limit the loss to just -0.09%. Trading appeared to be largely dictated by the moves in Oil. On the back of a smaller than expected drop in the latest crude supply data out of the EIA, WTI (-4.83) fell sharply to close at $45.14/bbl and the lowest since May 10th. Base metals also retreated while 10y Treasury yields finished higher (by 2bps) for the first time since last Wednesday. It’s worth highlighting that earnings season unofficially kicks off in the US next week which is one more variable to throw into the mixer for markets.
Turning over to the latest in Asia this morning where the bulk of markets are trading cautiously into the end of the week. Indeed the Nikkei (-0.39%), Hang Seng (-0.81%), Shanghai Comp (-0.81%) and Kospi (-0.61%) are all in the red with the ASX flat as we type. Credit markets are a bit more mixed while there’s been a bit of data released overnight. In the UK the GfK consumer confidence reading, in a survey conducted post Brexit from June 30th to July 5th, tumbled by the most in 21 years to -9 (from -1). It’s the biggest decline since December 1994. The survey also revealed that confidence amongst remain voters scored -13, while confidence for leave voters was -5. Meanwhile China has reported a bounce in auto sales during June to +9.5% ytd yoy from +8.4% in May.
Moving on. In the aftermath of the Brexit shock two weeks ago one positive we could draw at the time was that it might hasten a change in global policy and that the UK could be the first to seriously attempt ‘Helicopter Money’ or at least make it a marked policy to loosen the purse strings and use fiscal policy. Whilst we acknowledge the risks in such a strategy, the status quo of ever looser monetary policy and negative rates/yields is arguably more damaging. There might be a once in a millennium opportunity borrowing costs wise to invest for growth. It’s inevitable to us that central banks will have to ensure these costs stay at low levels by helping finance such investments but nevertheless it’s perhaps worth a shot.
On this, interestingly in the last two couple of days UK business secretary Sajid Javid has suggested that the UK commit to a ‘Growing Britain Fund worth up to £100 billion to fund business-friendly infrastructure programmes alongside the private sector’. While there will be lots of political posturing ahead of the leadership election it’s worth highlighting that policy could go in a different direction now and maybe Brexit is a perfect excuse for a u-turn.
Speaking of politics, yesterday we saw the Conservative Party leadership race narrow down to two. Theresa May and Andrea Leadsom will now go head-to-head after Michael Gove was eliminated from the contest yesterday. In the second-round ballot yesterday May took home 199 votes compared to Leadsom with 84 votes. We’ll have to wait until September 9th until the winner gets announced with UK bookmaker Ladbrokes currently making May the odds on favourite at 1/5 versus Leadsom at 7/2.
Over in Italy the latest banking sector headlines are suggesting that Banco Monte dei Paschi is working intensely with various authorities in a bid to make progress on tackling its bad-debt pile according to the Bank’s CEO. The CEO noted that the Board has agreed to respond to the ECB’s draft proposal request that it received and according to Bloomberg will disclose details of the ECB’s request once it receives a final version.
Staying in Europe, as expected that soft German factory orders data on Wednesday resulted in a negative read through to the May industrial production data released yesterday (-1.3% mom vs. +0.1% expected). That took the YoY rate down to -0.4% from +0.8%. Our economists noted that this leaves output 1.1% below the Q1 average and that the orders and IP data taken together continue to support their expectation that industry will be a drag on Q2 GDP. Over in the UK yesterday industrial production printed a little better than expected, albeit still negative in May (-0.5% mom vs. -1.0% expected).
Wrapping up yesterdays newsflow. The European Commission announced that they are escalating the Excessive Deficit Procedure (EDP) against Spain and Portugal for not taking effective actions to bring their deficits under control in line with Commission recommendations. DB’s Mark Wall noted that the ball is now in the court of European Finance Ministers. If finance ministers endorse the escalation, the Commission will propose the sanction, including a fine (at most 0.2% of GDP). In Mark’s view the chances are that it ends with a ‘classic European muddle through’, with at worst a zero fine.
Looking at the day ahead, this morning in Europe we’re kicking off in Germany where shortly after this is out we’ll get the latest trade numbers in Germany. France will then report their latest industrial production data before we get the May trade balance reading for the UK. This afternoon in the US it’s all about the aforementioned June employment report which is due out at 1.30pm BST. Later on this evening the May consumer credit data is released.
Before we sign off, it’s worth noting that over the weekend China will release the June inflation report. CPI is expected to fall to +1.8% yoy from +2.0% and PPI is expected to increase three-tenths to -2.5% yoy. Expect this and payrolls to set the early tone come Monday morning.
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