Frontrunning: April 7

  • U.S. fires missiles at Assad airbase; Russia denounces ‘aggression’ (Reuters)
  • Congress Supports the Airstrikes, Debates What Happens Next (WSJ)
  • Trump’s Syria Strike Sends Not-So-Subtle Warning to U.S. Rivals (BBG)
  • Russia Halts Cooperation With U.S. on Syrian Air Operations (WSJ)
  • Syria Says Strike Kills Five, Damages Air Base (WSJ)
  • Oil hits one-month high after U.S. missile strike in Syria (Reuters)
  • China fighter plane spotted on South China Sea island: think tank (Reuters)
  • Senate Expected to Confirm Gorsuch as High Court Justice (WSJ)
  • Traders Are Worried About Chinese Local Government Debt Again (BBG)
  • Jobs Report to Take Pulse of Wage Growth, Participation Rate (WSJ)
  • Nobody Is Saying Anything About How U.S. Earnings Season Will Go (BBG)
  • Libor Convictions at Risk as SFO Expert Witness Challenged (BBG)
  • Wall Street Is Making It Harder to Buy a Car (BBG)
  • U.S. stock funds’ weekly outflow largest in 2017: Lipper (Reuters)
  • Greece, Creditors Move Closer to Deal (WSJ)
  • Norway Wealth Fund Turns ‘Cautious’ on Stocks After Trump Rally (BBG)
  • Are Traders Creating a Bizarre New Feedback Loop… Feedback Loop… Feedback Loop? (WSJ)
  • Tech’s High-Stakes Arms Race: Costly Data Centers (WSJ)
  • Top investors help Deutsche Bank wrap up $8.5 billion capital hike (Reuters)
  • Oil Trader Gunvor Approached Rivals Over Possible Sale (WSJ)
  • Bank of England’s Carney calls for UK-EU bank rules pact after Brexit (Reuters)

Overnight Media Digest

WSJ

– The U.S. military launched nearly 60 Tomahawk cruise missiles against a Syrian air base Friday, responding to mounting calls for a display of force in the wake of this week’s suspected chemical-weapons attack in Syria. http://on.wsj.com/2o3ThH0

– President Donald Trump said Thursday he expects to secure a commitment from China to pressure North Korea to curb the nation’s nuclear ambitions, outlining a key objective of his two-day summit with President Xi Jinping of China. http://on.wsj.com/2o42GhX

– Senate Republicans voted to end the filibuster of Supreme Court nominations Thursday, setting the stage for the rapid elevation of Judge Neil Gorsuch to the high court and removing a pillar of the minority party’s power to exert influence in the chamber. http://on.wsj.com/2o3Jy3x

– Anglo-Dutch consumer-goods giant Unilever said it plans to divest its spreads division, combine two business units and boost shareholder returns with a higher dividend and share-buyback program. http://on.wsj.com/2o42izJ

– House Intelligence Committee chairman Devin Nunes is stepping aside from the panel’s probe of possible Russian interference in the 2016 election, citing the need to confront a congressional ethics inquiry into allegations that he improperly disclosed classified information to the public. http://on.wsj.com/2o3JGjx

– Federal Communications Commission Chairman Ajit Pai laid out preliminary plans to roll back the agency’s net neutrality rules in a meeting this week with trade associations. http://on.wsj.com/2o41B9Q

– Aetna Inc became the second insurer this week to say it will exit the Affordable Care Act insurance marketplace in Iowa next year, in the latest sign that the industry is pulling back from the exchanges amid uncertainty about the future of the business. http://on.wsj.com/2o3SGoC

 

FT

* U.S. Secretary of State Rex Tillerson said the Trump administration had begun efforts towards removing Syrian President Bashar al-Assad from power after the suspected gas attack in the war-torn country that killed more than 70 people earlier this week.

* Norway’s $915 billion sovereign wealth fund, the world’s largest, wants the firms it invests in to end long-term incentive schemes for chief executives.

* Twitter Inc said in a lawsuit on Thursday that it had received a demand from U.S. officials for records that could reveal the user behind an account opposed to President Donald Trump and that it was challenging the demand in court.

 

NYT

– Twitter Inc sued the federal government on Thursday to block the unmasking of an anonymous account that has posted messages critical of the Trump administration and has claimed to have ties to a government agency. http://nyti.ms/2o3dOeY

– Under pressure after spurning a blockbuster $143 billion takeover offer, Unilever said on Thursday that it would explore the sale of its spreads business, restructure two major divisions, review its dual legal structure and buy back $5.3 billion in stock as it seeks to cut costs and appease investors. http://nyti.ms/2oGDAIS

– Ride-hailing company Lyft has secured up to $500 million in a new round of funding that values it at $6.9 billion before the addition of new capital, according to two people briefed on the discussions, who asked to remain anonymous because the details were confidential. The privately held company may raise an additional $100 million, these people said. http://nyti.ms/2o8Bhgn

– Two former Barclays Plc traders have been acquitted in their retrial on charges that they plotted to manipulate a benchmark interest rate known as Libor. On Thursday, the jury acquitted Stylianos Contogoulas of a charge of conspiracy to defraud, a day after finding Ryan Michael Reich not guilty on a conspiracy charge. http://nyti.ms/2oPkInZ

– Seven & I Holdings Co Ltd, the Japanese retail giant that owns the 7-Eleven convenience store chain, said Thursday it had agreed to buy the Sunoco chain of gas stations for $3.3 billion, accelerating its expansion in the United States. http://nyti.ms/2p7xHka

– Robert Mueller, the former director of the Federal Bureau of Investigation, is set to oversee nearly $1 billion that the airbag maker Takata Corp has agreed to pay to victims and automakers affected by its defective airbags. http://nyti.ms/2oKXZfA

 

Canada

THE GLOBE AND MAIL

** The head of Canadian Imperial Bank of Commerce made his case to shareholders Thursday for the proposed $4.9 billion purchase of Chicago-based PrivateBancorp Inc, a week after hiking the offer price by 20 percent. https://tgam.ca/2og70N2

** The CEO of Royal Bank of Canada is urging all three levels of government to work together to solve the challenge of the Toronto area’s sky-rocketing house prices, one day after federal Finance Minister Bill Morneau called a special meeting with city leaders to discuss the problem. https://tgam.ca/2og2T3z

NATIONAL POST

** Canada’s banking regulator is prepared to move ahead with new rules to ensure the country’s bank’s have sufficient capital buffers for bad times — even if the mired international efforts of the Basel Committee remain stalled indefinitely. http://bit.ly/2og31jz

** Alberta and Saskatchewan are fighting over the shrinking number of energy head offices, but Crescent Point Energy Corp CEO Scott Saxberg thinks they should be more concerned about Canadian spending — and even head offices — migrating to the United States. http://bit.ly/2og4uWT

 

Britain

The Times

– A former Barclays Plc trader, Ryan Reich, acquitted over playing a part in the Libor-rigging scandal has claimed Bank of England officials were told the rate was being inflated years before regulators began their investigations. http://bit.ly/2oOXRch

– The European Central Bank has quashed any speculation that it may raise interest rates before the end of the year in a series of uncompromising comments. http://bit.ly/2oP1BdE

The Guardian

– Ryanair Holdings Plc has warned it will have to halt flights from UK for “weeks or months” if Theresa May does not seal an early bilateral Brexit deal on international aviation. http://bit.ly/2oP1qir

– Mothercare Plc’s chief executive has said the price of its clothing and toys would increase by 3 to 5 percent this summer following the decline in the value of the pound since the Brexit vote. http://bit.ly/2oOORng

The Telegraph

– Households face the end of free banking if the low-growth, low-interest rate environment persists, according to the International Monetary Fund. http://bit.ly/2oOIWi5

– Unilever Plc has unveiled plans to sell its margarine spreads business – including household brands such as Flora – as it reshapes itself following the audacious failed 115 billion pounds($143.39 billion) takeover attempt by US giant Kraft Heinz Co . http://bit.ly/2oOOzNc

Sky News

– UK Government department which investigates bankrupt companies is taking legal action against a former owner of BHS as part of its probe into the retailer’s collapse. http://bit.ly/2oP5Ndr

– The Co-operative Group Ltd has written off the value of its 20 percent stake in the troubled Co-operative Bank, reporting an annual loss of 132 million pounds ($164.59 million). http://bit.ly/2oOWQ3V

The Independent

– UK companies face serious consequences if they fail to tackle digital skills deficiencies within their workforce that are hampering productivity and increasing staff workloads, according to a study by the British Chambers of Commerce (BCC). http://ind.pn/2oOWlH7

– Oil major BP Plc has slashed CEO Bob Dudley’s pay packet by 40 percent for 2016 and cut the amount that he can pocket in future, in response to shareholder protest. BP said on Thursday that Mr Dudley’s total pay for 2016 would be $11.4 million, down from the $19.4 million he got for 2015. http://ind.pn/2oP7Tdo

 

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Russia To Upgrade Syria Air Defenses, Suspends Airspace Pact With U.S.

If Trump wanted to provoke the Kremlin – an odd decision considering all the daily “press coverage” that the Kremlin controlled the president – he has achieved just that: Russia said it will reinforce Syria’s air defences and, as reported previously, is sending a missile carrying warship to the eastern Mediterranean in response to a US cruise missile strikes on a Syrian government airbase.

The Russian ministry of defence said in a statement that “to protect key Syrian infrastructure a range of measures will be taken reinforce and improve the effectiveness of the Syrian armed forces air defence.” The announcement came as the Admiral Grigorevich, a cruise missile carrying frigate, passed through the Bosporus en-route to Russia’s Syrian navy base at Tartus.

Also on Friday Russia announced it had halted its air safety agreement with the US, meant to avoid “air incidents” with the US over Syria, saying US air strikes had caused “considerable” damage to Moscow-Washington relations. The memorandum, signed in October 2015, was designed to avoid clashes in the crowded airspace over Syria, with each side giving the other warning over planned strikes.

The defense ministry also said that six MiG-23 fighter jets were destroyed in the US missile strike on a Syrian airfield in Homs province, but the runway remained intact.  The strike on the Shayrat airfield in Syria’s Homs Province destroyed a material storage depot, a training facility, a canteen, six MiG-23 aircraft in repair hangars and a radar station.

Two Syrian servicemen are missing as a result of the US attack on an airfield in the country, while four were killed and six were injured extinguishing the flames, Russian Defense Ministry spokesman Maj. Gen. Igor Konashenkov said Friday. “According to the information of the leadership of the Syrian airbase, two Syrian servicemen went missing, four were killed and six received burn injuries during the firefighting,” he said.

The runway, taxiways and the Syrian aircraft on the parking apron remained undamaged, Russia’s Defense Ministry spokesman said in a statement. The ministry described the combat efficiency of the strike as “quite poor.”

“On April 7, 2017, between 3:42am and 3:56am Moscow time, two US Navy destroyers (USS Porter and USS Ross) fired 59 Tomahawk cruise missiles at Shayrat airfield in Homs Province, Syria, from an area near the Island of Crete in the Mediterranean Sea.

“According to our sources, only 23 of them reached the Syrian airbase,” Russian Defense Ministry spokesman Major-General Igor Konashenkov said, adding that the points of impact of the other 36 cruise missiles remain unknown.

The ministry also slammed the US actions as “a gross violation” of the memorandum of understanding signed by Moscow in Washington back in 2015 to prevent flight incidents in Syrian airspace.

All justifications for the strike are “groundless claims,” the ministry continued.

“The administrations of the United States are changing, but the methods of unleashing wars have remained the same since Yugoslavia, Iraq and Libya. And again, the pretext of aggression is not an objective investigation, but allegations, fact manipulation, showing photos and pseudo-vials at international organizations,” Konashenkov said.

“Russia made an earlier statement that the Syrian forces did not use chemical weapons. We are waiting for clarification from the US on undisputed – as they claim – evidence that it was the Syrian Army that deployed chemical weapons in the town of Khan Sheikhoun.”

The ministry also pointed to the events that followed the strikes, a large-scale offensive against the Syrian Army carried out by Islamic State and Al-Nusra Front terrorists. “We hope that this offensive was in no way coordinated with the US,” the ministry said.

“A number of measures aimed at strengthening and improving the effectiveness of the Syrian air defense system will be implemented in the near future in order to protect the vital parts of the Syrian infrastructure,” Konashenkov said.

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Trump Unites Congress: US Lawmakers Largely Support Syria Air Strikes

Eleven weeks into his administration, Trump’s Syrian airstrikes appear to have achieve what until last night appeared impossible: unite much of Congress in support of a Trump decision.

As Bloomberg report, U.S. lawmakers mostly expressed support for Trump’s strike against a Syrian airfield in response to an alleged chemical weapons attack, though some cautioned that Congress needs to be consulted on a comprehensive strategy if the strike is a harbinger of things to come.

It’s a contrast from 2013, when President Obama sought authorization for force against Syria but was met with widespread opposition. That effort was later abandoned for lack of support. Defense hawks and those who’ve warned against foreign military entanglements responded as expected. However, the bulk of lawmakers sought more details, with several seeking a new authorization of force specific to Syria.

Below is a full breakdown of the Congressional response so far, courtesy of Bloomberg

SUPPORTIVE, SEEKING STRATEGY DETAILS

  • House Speaker Paul Ryan says U.S. response to Syria’s “barbaric chemical weapons attack” is “appropriate and just”: “I look forward to the administration further engaging Congress in this effort”
  • Republican Sens. John McCain, Lindsey Graham: “Building on tonight’s credible first step, we must finally learn the lessons of history and ensure that tactical success leads to strategic progress. That means following through with a new, comprehensive strategy in coordination with our allies and partners to end the conflict in Syria”
  • Senate Democratic Leader Chuck Schumer says “making sure Assad knows that when he commits such despicable atrocities he will pay a price is the right thing to do” “It is incumbent on the Trump administration to come up with a strategy and consult with Congress before implementing it”
  • Republican Sen. Marco Rubio: “What must follow is a real and comprehensive strategy to ensure that Assad is no longer a threat to his people and to U.S. security, and that Russia no longer has free reign to support his regime”

NEW AUTHORIZATION NEEDED

  • House Democratic Leader Nancy Pelosi: “If the president intends to escalate the U.S. military’s involvement in Syria, he must to come to Congress for an Authorization for Use of Military Force which is tailored to meet the threat and prevent another open-ended war in the Middle East”
  • Democratic Sen. Elizabeth Warren says “use of chemical weapons‎against innocent Syrian men, women, and children is a clear violation of international law”; Says expanded military intervention would require congressional approval and “if President Trump expects such an authorization, he owes the American people an explanation of his strategy to bring an end to the violence in Syria”; “We should not escalate this conflict without clear goals and a plan to achieve them,” Warren says in statement
  • Oregon Democratic Sen. Jeff Merkley says it’s “essential” that “before the U.S. undertakes any ongoing military campaign in Syria, the president consult with Congress and seek congressional authorization, in accordance with Article I of the Constitution and the War Powers Resolution”
  • “Many Americans are deeply wary of being drawn into another war in the Middle East. We owe the nation full consideration of the complete range of options, including pursuit of an international agreement to end the war and end Assad’s reign of terror,” Merkley says in statement

SEEKING A COMPREHENSIVE TRUMP PLAN:

  • Democratic Rep. Seth Moulton and Republican Rep. Steve Russell, leaders of the Warrior Caucus, say can’t stand by in silence as dictators murder with chemical weapons, though “military action without clear goals and objectives gets us nowhere”
  • Republican Sen. Ben Sasse: “The president should propose to Congress a comprehensive strategy to protect American interests from a humanitarian crisis that threatens to destabilize our regional allies and create vacuums for jihadi sanctuaries”
  • Rep. Adam Schiff, ranking member of House Intelligence Committee, says actions “will not displace Assad, but may deter” use of chemical weapons in statement on Twitter: “Need a vote”: Schiff
  • Rep. Eliot Engel, top Democrat on House Foreign Affairs Cmte:‘‘It’s incumbent on the administration to work toward a long-term strategy that will stop the wholesale slaughter of the Syrian people and hold accountable those who have committed war crimes. Tomahawk strikes are not a long-term strategy”; Urges support for his bill, H.R. 1677, which seeks sanctions on entities supporting Bashar Al-Assad’s Syria govt

SUPPORT FOR SHOW OF STRENGTH:

  • Rep. Kay Granger, chairwoman of the House Appropriations Defense subcmte: “I cannot more strongly applaud President Trump’s decisive actions against the Government of Syria”
  • Republican Rep. Martha McSally praised the “measured, yet decisive” response, adding the attack showed the critical need for Raytheon’s Tomahawk production in Tucson, within her Ariz. district
  • Republican Sen. Johnny Isakson: “I support the president’s swift and decisive action to punish this dictatorship for the atrocities committed”
  • GOP Reps. Adam Kinzinger, Luke Messer and Lynn Jenkins were among those with similar statements calling the strike strong or decisive, and adding it shows the U.S. won’t sit on sidelines after atrocities

AGAINST THE STRIKE:

  • Sen. Rand Paul, R-Ky.: “While we all condemn the atrocities in Syria, the United States was not attacked”
  • Republican Rep. Justin Amash: “Airstrikes are an act of war,” he says on Twitter; “Atrocities in Syria cannot justify departure from Constitution, which vests in Congress power to commence war”
  • Democratic Sen. Tim Kaine, who was Hillary Clinton’s running mate in the 2016 presidential election: “President waging military action against Syria without a vote of Congress? Unconstitutional,” he says in Twitter post “Assad is a brutal dictator who must be held account for atrocities. But the president’s failure to seek congressional approval is unlawful”
  • Rep. Barbara Lee, D-Calif., who was lone vote against the 2001 AUMF: “Syria strikes are far beyond the scope of this war authorization,” she says in Twitter post, adding that Speaker Ryan “needs to bring a vote”
  • Democratic Rep. Jim McGovern: “Every president must obtain congressional authorization to launch military strikes”; Trump’s “attack on Syria is no exception”; “We all agree Assad attacks on people of Syria must stop, but it doesn’t justify a rush to military action without consulting Congress,” McGovern says on Twitter
  • Hawaii Sen. Brian Schatz, a Democrat, says Assad’s chemical weapons usage “abhorrent, but a military response is not the answer”

Source: BBG

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US Futures Rebound Sharply, Erase All Syrian Airstrike Losses

After initially tumbling in the aftermath of the U.S. missile attack on Syria which jolted financial markets, boosting haven assets and temporarily shifting investor focus from today’s jobs data , S&P futures have managed to recoup all losses (the Nikkei closed up 0.4% after sliding earlier in the session), with Europe also just fractionally lower and climbing fast.

A U.S. defense official told Reuters the missile strike was a “one-off”, helping to calm market nerves. “The U.S. missile strike on a Syrian air base overnight caused a knee-jerk shift into safe havens, although the impact was moderate as it is being interpreted as a one-off proportionate response,” said Ian Williams, a strategist at Peel Hunt in London.

Gold, crude and government bonds were among the biggest winners following the first military strike undertaken by Trump’s administration, as some traders sought safety and others judged increasing tension in the Middle East would spur crude. Russia’s ruble dropped the most in almost a month and its bonds fell as optimism over a detente with the U.S. evaporated. The lira and stocks retreated in Turkey, which shares a border with Syria.

The U.S. dollar recouped all of its losses against a basket of major currencies and was last trading little changed. S&P 500 futures were down 0.1%. European stocks fell 0.3% weighed down by weakness in mining stocks as investors locked in some profits following the sector’s stellar run this year.

While volatility also spiked across global stock markets in the wake of the attacks, the initial impact began to fade for some assets as investors resume digesting a week of developments, from a meeting between Trump and President Xi of China, to Fed signals it may reduce its balance sheet this year and the ECB underscoring its dovishness as Bloomberg notes. Attention now turns to payroll data, after a strong private reading and weak automaker sales gave conflicting signals on the U.S. economy.

As of 6:40am ET, S&P 500 futures slipped less than 0.1% percent, while the Stoxx Europe 600 Index dropped 0.3 percent. Volatility measures from Hong Kong to Europe increased. Asian stocks shook off declines to follow Japanese equities higher, with yen rallying along with Treasuries after Syria strikes. Gilt futures gained after soft U.K. manufacturing data, some buying from domestic accounts being seen, with Russia’s ruble falling most among major global currencies and the nation’s borrowing costs surging as U.S. airstrikes dash hopes for an improvement in ties under Donald Trump.

Spot gold was up a percent while high-rated euro zone government bonds edged lower. The yield on Germany’s 10-year government bonds fell to a one-month low. Overnight, U.S. Treasury yields dropped to their lowest level in over four months at 2.29 percent

“Safe-haven flows are always affected by political events, and when it affects countries where the U.S. and Russia are interested, then investors become even more nervous because of relations (between those two),” said DZ Bank strategist Daniel Lenz.

While it will be of secondary importance today, overnight China reported that its FX reserves rose fractionally for a second consecutive month.

Looking at the day ahead, non-farm payrolls may rise by 180k, according to economists (a full preview can be found here) slightly less than the six-month and 12-month averages. Fed’s Dudley speaks on financial regulation.  Elsewhere, euro zone finance ministers are due to meet with a discussion on Greece’s progress in implementing reforms needed to unlock aid part of the agenda.

Bulletin Headline Summary from RanSquawk

  • US launched cruise missiles against targets in Syria, with about 60 tomahawk missiles fired towards a military airfield in near Homs
  • European equities followed the soft lead from Asia, with all sectors trading in the red with the exception of energy names
  • Looking ahead, highlights include US and Canadian Jobs reports, Fed’s Dudley, ECB’s Coeure and Constancio

Market Wrap

  • S&P 500 futures down less than 0.1% to 2,351.25
  • STOXX Europe 600 down 0.3% to 379.17
  • MXAP up 0.3% to 146.61
  • MXAPJ down 0.1% to 479.55
  • Nikkei up 0.4% to 18,664.63
  • Topix up 0.7% to 1,489.77
  • Hang Seng Index down 0.03% to 24,267.30
  • Shanghai Composite up 0.2% to 3,286.62
  • Sensex down 0.2% to 29,867.43
  • Australia S&P/ASX 200 up 0.1% to 5,862.47
  • Kospi down 0.05% to 2,151.73
  • German 10Y yield fell 1.6 bps to 0.247%
  • Euro down 0.06% to 1.0638 per US$
  • Italian 10Y yield unchanged at 1.975%
  • Spanish 10Y yield fell 1.9 bps to 1.613%
  • Brent Futures up 1.4% to $55.67/bbl
  • Gold spot up 1% to $1,264.36
  • U.S. Dollar Index up 0.1% to 100.76

Top Overnight News

  • U.S. Strikes Syria After Gas Attack, Raising Stakes With Russia
  • Putin Calls U.S. Syria Strike Aggression, Stops Air Cooperation
  • Trump Hails ‘Friendship’ With China’s Xi Before Syria Attack
  • Carney Urges Banks to Prepare for All Potential Brexit Outcomes
  • U.K. Manufacturing, Construction Point to Loss of Momentum
  • Medtronic Says Heart Pump Prelim. Results Met Primary End Point
  • Medtronic Says Recall of Adjustable Valves, Shunts Began Feb. 22
  • Hologic Gets $721.1m Defense Logistics Agency Radiology Contract
  • GM China March Sales Volume Rise at Fastest Pace Since August
  • Alphabet Moves Two Top Google Fiber Executives Off Project
  • Arconic Reports Sale of Fusina, Italy Rolling Mill
  • TD Ameritrade Investors Sue Board Over Scottrade Acquisition

Asia markets shrugged off the early gains from the gains on Wall St. as sentiment in the region soured after the US conducted strikes in Syria. This saw ASX 200 (+0.1%) and Nikkei 225 (+0.4%) trimmed opening gains, although the latter staged a recovery with outperformance in Toshiba shares on reports Hon Hai is to submit a near JPY 3tln bid for the Co.’s chip unit. Hang Seng (-0.1%) and Shanghai Comp. (+0.2%) were mixed despite the PBoC continuing to hold off on open market operations which resulted to a weekly net drain of CNY 100bIn. 10yr JGBs and T-notes were underpinned by safe-haven demand resulting from the Syria strike, which saw the US 10yr yield drop to a 4-month low and under 2.3%. PBoC refrained from conducting open market operations for a weekly net drain of CNY 100bIn vs. Prey. net drain of CNY 290bn.

Top Asian News

  • China’s FX Reserves Pick Up for Second Month on Weakening Dollar
  • Philippines to Follow Indonesia With Tax Amnesty to Spur Revenue
  • Abe Adviser Calls for Push Back If U.S. Attacks Yen Policy: Rtrs
  • Dymon Said to Wind Down Aventia Hedge Fund in Restructuring Move
  • India Rising as Steelmakers to Beat Japan in Global Rankings
  • China Says Syria Issue Should Be Solved Via Political Means

European equities followed the soft lead from Asia, with all sectors trading in the red with the exception of energy names. Syria has dictated play here in a similar fashion to other asset classes amid light equity specific news, and with participants now awaiting the US jobs data or any comments from president Trump this afternoon on any future action in Syria, as well as continued attention on the progress of his talks with China President Xi. The miss of Exp. in UK data was relatively shrugged off by Gilts, which continued to trade in line with the rest of European paper. Bunds opened higher as European participants reacted to the aforementioned overnight developments, however the German benchmark has spent much of the session paring its opening gains, albeit remaining modestly higher by mid morning. Periphery yields continued to trade in a tight range, with participants keeping an eye on any Greece related developments from the Eurogroup meeting, although with volatility more likely to hold off until this afternoon’s NFP report from the US.

Top Asian News

  • Merkel, Hollande Say Assad Alone Bears Responsibility for Strike
  • Greece Bailout Deal Said to Be a Step Closer as Ministers Meet
  • German Industrial Output Unexpectedly Rose in February
  • Another Euro Peg Feels the Heat as Fixed Currency Regimes Fall
  • Linde’s Reitzle Avoids Trading Probe Amid Praxair Deal
  • Santander Proposes Dividend Hike as Botin Sees Brighter Future
  • EU Jobs Carve Up Starts Again With Dijsselbloem Under Threat
  • U.K. House-Price Growth Slows to Weakest in Almost Four Years
  • Diamond Miner Ends Large Gem Drought With 114-Carat Find
  • Kloeckner Pentaplast Said to Buy Linpac to Bolster Food Packaging

In currencies, the ruble dropped 0.9 percent as of 11:16 a.m. in London. The currency has been trading near the highest since July 2015. President Vladimir Putin believes the U.S. airstrikes caused “considerable damage” to relations with Russia, a Kremlin spokesman said. The Bloomberg Dollar Spot Index was little changed. The yen rose 0.2 percent, paring gains of as much as 0.6 percent. The euro slipped 0.1 percent, the British pound dropped 0.4 percent, and the Turkish lira pared losses to trade 0.5 percent lower. Focus today has fallen on the overnight airstrikes by the US on Syria, with safe havens the notable benefactors. The likes of JPY and CHF have both been the notable movers in FX markets in a flight to safety. Elsewhere in FX, the only notable data of the morning has come in the form of the UK industrial and manufacturing production, with the downbeat reading weighing on GBP as GBP/USD slipped back below 1.2450.

In commodities, West Texas Intermediate crude climbed 1.4 percent to $52.41, the highest in a month. Oil is up 3.6 percent for the week. Gold jumped 1.1 percent to $1,264.92, the highest since November, following two days of declines. As well as the safe haven currencies, the strikes in Syria also saw upside in gold, with the yellow metal reaching 5 month highs amid concerns of further aggression in the future. The strikes in Syria also pushed the energy complex higher, with WTI futures trading around USD 52.50/bbl amid concerns that global tensions could cause obstacles in the supply chain.

Looking at the day ahead, in the US the aforementioned March employment report will be the main point of focus while wholesale inventories and consumer credit data are the other releases due in the US. Away from the data the Fed’s Dudley is due to give a talk on the state of financial regulation in the US. Away from that BoE Carney speaks this morning at 10am BST while the Euro area finance ministers meeting also kicks off in Malta today. Clearly any headlines which emerge from Trump’s meeting with Xi Jingping are also worth watching.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 235,000
    • Unemployment Rate, est. 4.7%, prior 4.7%
    • Average Hourly Earnings MoM, est. 0.2%, prior 0.2%; Average Hourly Earnings YoY, est. 2.7%, prior 2.8%
    • Average Weekly Hours All Employees, est. 34.4, prior 34.4
    • Labor Force Participation Rate, prior 63.0%
    • Underemployment Rate, prior 9.2%
  • Wholesale Trade Sales MoM, prior -0.1%; Wholesale Inventories MoM, est. 0.4%, prior 0.4%
  • Consumer Credit, est. $15.0b, prior $8.79b

DB’s Jim Reid concludes the overnight wrap

We’re straight to breaking news this morning where overnight, President Trump has taken the first military action of his young Presidency, launching a cruise missile attack at Syria following the gas attack within the country earlier this week. The headlines emerged at about 2.15am BST and reports suggest that 59 missiles were fired, targeting an air base, with President Trump confirming the order a short time ago. Trump released a statement saying that it is in “the vital national security interest of the United States to prevent and deter the spread and use of deadly chemical weapons. There can be no  dispute that Syria used banned chemical weapons and violated its obligations under the chemical weapons conventions”. According to Bloomberg the White House was said to have notified Russian forces in Syria prior to the attack. The attack also comes after US secretary of state Rex Tillerson warned last night that a “serious response” was needed and that “steps are underway” for the removal of Syria’s Assad regime. Since the attack we’ve seen House Speaker Ryan and Senator McCain both come out with messages of support.

Markets initially reversed early gains and moved into risk-off mode after the strikes but we are seeing a recovery as we go to print. At the time of writing, the Nikkei is back to +0.52% having been up as much as +1.00% initially then down as much as -0.44% following the news. The Shanghai Comp (+0.25%) is now at its highs after initially fluctuating between gains and losses while the Kospi is back to -0.07% after being down as much as -0.47%. The Hang Seng (-0.56%) has also partially recovered earlier heavier losses. The rebound is partly being helped by a further rally for Oil (WTI +1.62% to $52.23/bbl) following the news of the attack. Gold (+0.87%), the Yen (+0.20%) and 10y Treasuries (-3.0bps to 2.310%) are firmer but have also pared some initial stronger gains.

Needless to say it’ll be important to see how Europe opens on the back of the overnight news. In addition to digesting these developments, today is payrolls Friday in the US. As we said earlier in the week, it does seem the emphasis for the timing and pace of global hikes has shifted away from employment to inflation in recent months so it’s perhaps not as much of a focal point as some recent prints but the 263k on ADP on Wednesday creates some intrigue. The market is at 180k and DB at 150k with our economists below market on the basis of weather effects as a result of the Winter Storm Stella. As always keep an eye on the other components of the report including the unemployment rate (consensus for no change at 4.7%), average hourly earnings (+0.2% mom expected) and average weekly hours (expected to hold steady at 34.4hrs).

Moving on I’ve had a few emails saying that the story I told about my school partnership with golfer Paul Casey in yesterday’s EMR was one I’d told before so apologies for that. I’m either running out of anecdotes, losing my memory or spending too much time watching ‘In The Night Garden’. Or all three. Talking of repetition, yesterday I published a Credit Bites on a similar theme to that I’ve published on a couple of times already this year. Recycling anecdotes and research at the moment. The piece was called “Euro Credit – more expensive than it looks” and highlights that although EU IG spreads to Bunds  have been broadly flat since mid-August, Euro Stoxx 50 and peripheral equities are up around 15% and 20% respectively over the same period. US IG credit is also around 25bps tighter since mid August. So it looks as if there’s some catch up potential. However the reality is that the benchmark (bunds) has been the star performer in the DM government bond world over this period.

Against a ‘weighted’ government benchmark that we created that matches the geographical split of the corporate index, current spreads are actually fairly close to their post crisis tights and with it close to the tightest they’ve been in a decade. The point we’ve been trying to get across over the last few months is that although the technicals for credit are strong with CSPP, we think the technicals for Bunds are even stronger. See the note at around 1.15pm BST yesterday or ask Sukanto.Chanda@db.com for a copy.

It’s likely that the other focus for markets today will be the headlines that emerge from the meeting between President Trump and China President Xi Jingping. So far we haven’t heard much aside from some reports in the press suggesting that Xi will offer Trump a number of sweeteners including further opening of Chinese markets to US companies. Unsurprisingly the Syria news has taken over as the main story for now and it may make for interesting discussions on North Korea given Trump’s actions overnight and his comments last weekend about taking action on North Korea unilaterally if he had to. Separate to this but staying with politics, Supreme Court nominee Neil Gorsuch is expected to be confirmed by the Senate today after majority leader Mitch McConnell scrapped the requirement for nominees to receive 60 votes in the 100 seat Senate in what is called rather extremely the “nuclear option”. Instead a simple majority is all that is required now.

Over in markets, geopolitical concerns and the prospect of a payrolls Friday looming helped to keep markets mostly in check yesterday. Both the S&P 500 (+0.19%) and Stoxx 600 (+0.18%) finished with similar modest gains helped by a bit of a boost from the energy sector after WTI Oil (+1.08%) headed back up towards $52/bbl again (above it this morning as we mentioned earlier). Credit indices were also marginally tighter although sovereign bond markets were incredibly muted. 10y Treasuries finished the day a small 0.5bps higher in yield at 2.342% while 10y Bunds were a similar amount higher at 0.259%.

Moving on. While markets weren’t particularly exciting yesterday there was plenty of focus on the ECB with the release of the March minutes and also comments from Draghi and his colleagues at the ‘ECB and its watchers’ conference. In terms of the minutes, the text revealed that “looking ahead, it was recalled that, if the euro area economy were to recover further and as inflation proceeded further on its path towards the Governing Council’s inflation aim in a sustained manner, a discussion on policy normalisation would become warranted in the future”. This passage was probably the most significant insofar as it suggested that a likely change to language is coming from the Bank. ECB President Draghi emphasised however that the ECB is still in a steady as we go mode for now after saying that “I do not see cause to deviate from the indications we have been consistently providing in the introductory statement to our press conferences” and that “we have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook which remains conditional on a very substantial degree of monetary accommodation”. Meanwhile ECB Chief Economist Peter Praet said that “forward guidance implies a sequencing between the interest rate policy and the quantitative policy that can most efficiently internalize and exploit the intimate complementarities between these two key components of our current stance”.

For completeness, yesterday’s data did little to move the dial. In the US initial jobless claims fell to 234k last week which lowered the four-week average to 250k. In Europe the only notable data came from  Germany where factory orders printed at +3.4% mom in February following a sharp decline in January.

Looking at the day ahead, this morning in Europe the main focus will likely be on the February industrial production reports which are due to come from Germany, France and the UK. We are also due to get February trade data from those countries as well as house prices data in the UK. Over in the US the aforementioned March employment report will be the main point of focus while wholesale inventories and consumer credit data are the other releases due in the US. Away from the data the Fed’s Dudley is due to give a talk on the state of financial regulation in the US this evening at 5.15pm BST. Away from that BoE Carney speaks this morning at 10am BST while the Euro area finance ministers meeting also kicks off in Malta today. Clearly any headlines which emerge from Trump’s meeting with Xi Jingping are also worth watching.

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Putin Responds: Syria Strikes “Cripple US-Russia Relations”; Deploys Cruise Missile Frigate To Syria

Responding to Trump’s unexpected military attack on Syria in which 59 cruise missiles were launched (of which only 23 allegedly hit their target), Russian President Vladimir Putin “regards the strikes as aggression against a sovereign nation,” his spokesman Dmitry Peskov said, noting that the president believes the strikes were carried out “in violation of international law, and also under an invented pretext.”

The Kremlin spokesman insisted that “the Syrian army doesn’t have chemical weapons,” saying this had been “observed and confirmed by the Organization for the Prohibition of Chemical Weapons, a special UN unit.”

The Russian president said he sees the US missile strikes as an attempt to distract attention from civilian casualties in Iraq, Peskov added.

“This step deals significant damage to US-Russian ties, which are already in a deplorable state,” Peskov said and added that the US has been ignoring the use of chemical weapons by terrorists and this is dramatically aggravating the situation, in Putin’s opinion.

“The main thing, Putin believes, is that this move [by the U.S.] doesn’t draw us nearer to the end goal in the fight with international terrorism and on the contrary, deals a serious setback to the creation of an international coalition in the fight with it,” Peskov said.

* * *

Other Russians took the opportunity to opine as well, led by Russian foreign minister Sergey Lavrov who said the US missile attack on a Syrian airbase is an act of aggression under a far-fetched pretext and is reminiscent of the 2003 invasion of Iraq.

Quoted by Tass, the top Russian diplomat said “It is an act of aggression under a completely far-fetched pretext. This is reminiscent of the situation in 2003, when the US and the UK, along with some of their allies, invaded Iraq without the consent of the UN Security Council and in violation of international law.”

“When speaking about the military intervention in Iraq many years after it happened, Tony Blair (who served as the Prime Minister of the United Kingdom from 1997 to 2007) acknowledged that they had misled everybody,” Lavrov emphasized. “Now they did not even bother to provide any facts referring only to photos,” he noted. “They indulged in speculations on children’s photos, on evidence provided by various non-governmental organizations, including the so-called White Helmets, which staged various ‘incidents’ to instigate action against the Syrian government.”

Moscow will demand truth of Idlib events, Lavrov stressed. “It is regrettable that all these causes do more harm to the already damaged relations between Russia and the United States. Hope remains that these provocations will not entail irreversible effects,” Lavrov said.

Russian lawmakers also took to the microphone on Friday, warning that the U.S. airstrikes in Syria could lead to an escalation of conflict in the Middle East and dash any plans for a U.S.-Russian coalition against terrorism.

“It’s a new round of escalation in the Middle East. These ill-judged, irresponsible actions don’t contribute to global security, security in the Middle East,” Andrei Krasov, the first deputy head of the defense committee in the Russian lower house of parliament, told state news agency RIA. “Other military conflicts, an expansion of military conflicts, are entirely possible,” he added.

Russian Senator Konstantin Kosachev said the airstrikes meant the possibility of a broad antiterror coalition in Syria “bites the dust before it was even born.”

He said the aim of the U.S. strike was to “rubber stamp” responsibility on Mr. Assad’s for the chemical attack in Idlib province on Tuesday. “‘The walls of Trump’ are multiplying. And everything started so well. It’s a real shame,” said a post on the Facebook page of Mr. Kosachev, head of the international relations committee in Russia’s upper house of Parliament.

Another lawmaker, Mikhail Emelyanov, warned against the risk of clashes between Russian and U.S. forces. “The U.S. is being dragged into the war in Syria in the full knowledge that Russia is supporting Syria and our troops are there, which means it’s fraught with direct clashes between Russia and the U.S. and the consequences could be the most serious, even armed clashes and exchanges of strikes,” Mr. Emelyanov told Interfax news agency.

* * *

In immediate response, Moscow suspended its memorandum of understanding on flight safety in Syria with the US following the missile strike, calling the attack “a demonstration of force.” The Russian military has supported the Syrian government’s version of the events in Idlib, saying that Damascus attacked an arms depot where chemical weapons had been stockpiled by Islamic State and Al-Nusra Front militants.

“Without bothering to investigate anything, the US went forward with a demonstration of force, a military confrontation with a country that is fighting international terrorism,” the Foreign Ministry’s statement reads.

“Obviously, the cruise missile attack was prepared beforehand. Any expert can tell that the decision to strike was made in Washington before the events in Idlib, which were used as a pretext for a demonstration,” the statement reads.

The Memorandum on air safety was signed in October 2015, after Russia came to Syria to fight international terrorism at the invitation of the country’s government. The document of understanding was designed to prevent possible mishaps between the Russian and US Air Forces operating independently in the region.

Russia’s Foreign Ministry has condemned the attack as an example of the “reckless attitude” that has only worsened “existing world issues” and created a “threat to international security.”

* * *

Additionally, according to Tass, in response to the strikes, the Russian frigate Admiral Grigorovich armed with Kalibr cruise missiles will be deployed to the Tartus naval base in Syria. The Russian Black Sea Fleet’s frigate The Admiral Grigorovich, currently on a routine voyage, will enter the Mediterranean later on Friday, a military-diplomatic source in Moscow told TASS, adding that the ship would make a stop at the logistics base in Syria’s port of Tartus.

“The Russian ship armed with cruise missiles Kalibr will visit the logistics base in Tartus, Syria,” the source said.

The Admiral Grigorovich is currently near the Black Sea straits. It is scheduled to enter the Mediterranean at about 14:00 Moscow time. The ship left on a voyage after replenishing supplies at Novorossiisk and taking part in a joint exercise with Turkish ships in the Black Sea. Tass’s source said the frigate’s presence off Syria’s shores will depend on the situation.

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Payrolls Preview: Downside Surprise Eyed From Winter Weather, Govt Hiring Freeze

Here is the consensus for the key numbers the BLS will report at 8:30am ET on Friday morning

  • March Nonfarm Payrolls Exp. 180K, the lowest print of 2017 (Prey. 235K, Jan. 227K) US Unemployment Rate (Mar) M/M Exp. 4.7% (Prey. 4.7%, Jan. 4.7%)
  • Average Hourly Earnings Exp. 0.20% (Prey. 0.20%, Jan. 0.30%)

Big Picture: Friday’s non-farm payrolls comes ahead of the May 2-3rd Fed meeting, where according to Fed Fund markets there is only a 5% chance of a 25bps hike The Fed’s favoured inflation metric (PCE) edged above the mandated 2% Y/Y in February and inflation remains under the spotlight where the rate hike path is concerned. As such, once the fast money moves subside, as has been the case in the past several months, the focus may well fall on the average hourly earnings to see If the uptick in inflation is holding up. This is particularly the given the February report showed real personal spending pulling back slightly by 0.1%, when a 0.1% increase was forecasted. Last report showed AHE dipping to 0.2% from 0.3% in January’s print and a return to Jan’s levels could indicate that a slightly more optimistic outlook on inflation is justified. Its worth noting that this report comes amid a backdrop of bad weather and temporary headwinds are factored in.

Goldman’s payolls forecast is even more dour, as economist Spencer Hill says the bank estimates nonfarm payrolls increased 170k in March, compared to consensus of +180k and February’s 235k increase. The factor behind the potential donwside surprise are a “significant drag from unseasonable winter weather, which we believe may have boosted February payroll growth by 30-50k and could weigh on March growth by as much as 30-60k.” Some more details on the adverse weather impact:

We believe the sharp drop in temperatures and the early-month winter storms will depress payroll growth in weather-sensitive categories. Winter Storm Stella impacted the Midwest and East Coast early in the payroll survey week – and much of the snow that accumulated during the storm did not melt until Thursday or Friday. We believe the weather impact could be particularly large in comparison to February, which was marked by unseasonably warm weather and limited snowfall.

Alternatively, Goldman is not assuming a significant impact from the federal hiring freeze implemented in late January, which did not appear to materially affect the February report.

On the unemployment rate front, Goldman forecasts an unchanged print at 4.7%, as upside risk from a potential pause in household employment growth is offset by some scope for a pullback in the participation rate, following its sharp year-to-date increase. Not diverging from the consensus, Goldman expects AHE to increase 0.2% month over month and 2.7% year over year, reflecting tightening labor markets offset by slightly negative calendar effects.

Recent data: Despite the potential weather setback, Wednesday’s ADP employment report showed a another blowout number 263K against an expected 187K. Although it is not viewed as a an accurate indicator of Friday’s report, the strong data is part of a trend (previous five readings have been greater than 200K) of increasingly strong employment figures in the US. The strong ADP has caused many analysts to adjust higher their estimates for tomorrow’s NFP. Other data which affirms the upward trend came from further improvement in manufacturing employment surveys, a new cycle high for the Conference Board labor market differential, and continued low readings of initial jobless claims (despite an uptick in the final week).

Factors arguing for a stronger report (per Goldman):

– ADP. The payroll processing firm ADP reported a 263k rise in private payroll employment in March, a solid pace that sustantially exceeded expectations of +185k. In past research, we have found that large surprises in the ADP report tend to be predictive of a subsequent nonfarm payroll surprise. Offsetting this consideration, ADP’s February estimates were revised down significantly, and we believe some of the March strength reflects the lagged impact of accelerating nonfarm payroll growth (as well as the other financial and economic inputs to the ADP model). These factors, as well as differences in data collection methodologies, may be partially masking the impact of Winter Storm Stella, which we expect to manifest more visibly in tomorrow’s employment report. Nonetheless, the ADP data clearly imply a solid pace of underlying job growth.

The ADP report also showed another above-trend increase in construction (+49k) but a surprising decline of 32k in education employment. In the revamped ADP model, growth in these subindustries show strong correlations with their nonfarm payroll counterparts (0.74 and 0.75 since 2011, respectively). While some of the accuracy may reflect the impact of methodological revisions to the ADP regression model, it’s worth noting that the first vintage ADP reports also successfully anticipated the weak education payrolls growth in October 2016 as well as the strong construction job gains last month.

– Manufacturing sector surveys. Most employment components of manufacturing sector surveys were stronger in March. Notably, the ISM manufacturing employment component strengthened to its highest level since mid-2011 (+4.7pt to 58.9). The Philly Fed (+6.4pt to +17.5), Empire State (+6.8 to +8.8), and Richmond Fed (+10pt to +20) employment components all improved as well. On the softer side, the Kansas City Fed (-4pt to +13) and Dallas Fed (-1.2pt to +8.4) both pulled back in March, but remain at encouraging levels. The Chicago PMI employment component also reported a decline after a sharp gain in February. Manufacturing payroll employment rose 28k in March, its third consecutive increase.

– Job availability. The Conference Board’s Help Wanted Online (HWOL) report showed a modest increase in March online job postings (+2%), rebounding from February’s 7% drop. However, we continue to place limited weight on this indicator at the moment, in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads.

Arguing for a weaker report:

Winter Storm Stella. We believe the early-month winter storms are likely to exert a meaningful drag on March payrolls growth, as Winter Storm Stella hit the Midwest and East Coast at the beginning of the payrolls survey week. Because February was marked by unseasonably warm weather and limited snowfall, the month-to-month change in snowfall during the survey week was at its highest in the 12-year history of our dataset. Historically, swings of this magnitude have been associated with meaningful decelerations in weather-sensitive payroll categories, such as construction, retail, and leisure and hospitality (Exhibit 1).

Exhibit 1: Weather Likely Shifting from a Boost to Payroll Growth in February to a Drag in March

Regional granularity from the January and February payrolls data is also suggestive of a meaningful boost from weather, as payrolls in New England, Mid-Atlantic, and East North Central regions – all of which benefitted from a relatively mild winter in those months – increased 110k in January and 101k in February (compared to a 2016 average pace of +46k). Weather-sensitive industries in the regions contributed the bulk of this cumulative acceleration.

Looking ahead to March, one additional consideration is that the effects of Winter Storm Stella appear to have lingered throughout the survey week in many populated areas. We illustrate this in Exhibit 2, which plots daily snow cover in four major metropolitan areas across the Midwest and Northeast, based on weather-station data from the National Centers for Environmental Information (NCEI/NOAA). As a point of comparison, the snow produced by the January storms in the South – which did not appear to materially affect payrolls – had largely melted away by the Tuesday of that survey week. This increases our conviction at the margin that we should see evidence of a drag from weather in tomorrow’s report. Taken together, our base case expectations assume that weather boosted February payroll growth by roughly 30-50k. The payback for this and a slight weather-related payroll boost in January could take 30-60k off of March payroll growth, producing an overall weather-related swing of 60-110k.
 
Exhibit 2: In Contrast to the January Winter Storms in the South, Much of the Snow Accumulated During Winter Storm Stella Remained on the Ground during the Payrolls Survey Period

– Federal hiring freeze. The new administration’s hiring freeze for federal workers (excluding defense and public safety) went into effect on January 23rd, one week into the February payrolls survey period – but so far its impact appears quite limited, with federal payrolls actually increasing by 2k in February (mom sa). The impact also seems minor in the context of federal job growth during the 1981 federal hiring freeze at the start of the Reagan administration (Exhibit 3). Thus far, government departments may have been able to offset the hiring freeze through reduced attrition or increased contracted hiring, and these employer strategies may help explain the minimal impact of the hiring freeze in last month’s report. Accordingly, we expect only a modest drag from the freeze in tomorrow’s report and are assuming a flat reading for total government payrolls.

Exhibit 3: Federal Hiring Freeze Exerting Minimal Impact on Payrolls So Far

– Job cuts. Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment increased by 14k to 47k in March, a one-year high.

Seasonals. Since 2010, March payroll growth has surprised negatively relative to consensus in five of the seven instances, with an average surprise of -43k. This may suggest some additional downside risk to the extent the BLS seasonal factors have not fully evolved to reflect this tendency.

Labor supply constraints. We view the labor market as close to full employment, and as slack diminishes further, this should exert upward pressure on wages and potentially downward pressure on job growth – particularly as the unemployment rate in a given industry or geography falls meaningfully below its structural rate.

Neutral Factors:

– Service sector surveys. Employment components of service sector surveys were mixed in March, but all remained in expansionary territory. The ISM non-manufacturing (-3.6pt to 51.6), New York Fed (-4.4pt to +13.6, SA by GS), and Markit PMI Services employment components softened, but remain at levels consistent with expansion. Meanwhile, the Philly Fed (+4.8pt to +17.2), Richmond Fed (+10pt to +17), and Dallas Fed (+2.2pt to +8.1) non-manufacturing employment components moved higher. The key labor market subcomponent of the Consumer Confidence report rose to a 16-year high (+5.2pt to +12.2). Service sector payroll employment grew 132k in March and has increased 149k on average over the last six months.

Jobless claims. Initial claims for unemployment insurance benefits remained stable overall at a very low level, averaging 247k during the four weeks between the February and March payroll survey periods. However, these averages mask a sharper rise during the payroll week itself that we believe reflected winter storm-related disruptions. Jobless claims rose 15k during the survey week and remained elevated by roughly that magnitude in the following week. Some of these filings likely reflected individuals who missed work during the survey period. Considering this, the underlying pace of jobless claims arguably improved further, consistent with our overarching view on payrolls: solid fundamentals offset by pronounced storm effects.

The WSJ’s 6 Things to Watch in the March Jobs report:

Hiring Momentum End: as Goldman below, WSJ warns, citing RBC economists, that the recent torrid pace of  may be unsustainable due to warmer-than-usual weather. “Don’t be surprised if we see payback for this in March”

Construction Employment: the abnormally hot weather – especially during the second-hotted February on record – boosted construction hiring.  The construction industry added 58,000 jobs in February, its strongest gain in a decade. The sector may have been the biggest beneficiary of unusually balmy weather, which would allow projects to start sooner and draw hiring into typically cooler winter months

Hiring freeze: President Donald Trump on Jan. 23 ordered a federal hiring freeze, which could start to show up in the March report

Average Hourly Earnings: Average hourly earnings rose 2.8% Y/Y last month, near the fastest pace of growth during the current cycle. A pickup in wage growth would signal employers are being forced to raise pay as the labor market tightens and workers gain more leverage. Sequentially, consensus expects a 0.2% increase.

Unemployment: The headline unemployment rate fell to 4.7% in February. While that’s a clear sign of improvement from earlier in the recovery, the figure only counts people actively looking for work. Those who have become discouraged or given up show up in different statistics.  The broadest measure, which counts people who want full-time jobs but are stuck in part-time positions, was 9.2%, matching the lowest level since 2008.

Long-term decline in the participation rate: Rconomists, and Jamie Dimon recently, have been especially concerned with the long-term decline in the labor-force participation rate among those 25 to 54 years old–people who should be in their prime working years. The share of prime-age people either working or looking for work ticked up to 81.7% in February, its highest level since June 2011. If that trend continues, it would suggest enough decent jobs are being generated to keep people in the workforce.

* * *

Fed impact: The impact upon the rate hike path from this release should be minimal, fed speak has been clear how many rate hikes are expected this year and one NFP reading is very unlikely to derail the plan — especially as employment metrics remain strong in the US economy. There are also wider factors at play affecting the Fed’s thinking, such as an inflated stock market, large balance sheet and the new trump administration’s proposed fiscal easing policies — labour market slack is not a primary concern of the Fed at this moment in time.

Market Reaction: As ever, fast money moves will surround the initial headline. It is worth noting that this report comes before a meeting in which the chances for a hike are small, and therefore its impact may be diminished. A stronger than expected number historically sends the USD higher and Treasuries lower and vice versa for a weaker number, before markets digest some of the other details of the report.

h/t: @RanSquawk

 

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Breslow: The Market’s Reaction To Syrian Strikes Was “Ridiculously Overdone”

Bloomberg’s ex-FX trader Richard Breslow is out with his daily dose of wisdom, and in his latest overnight note he urges fellow traders to “Try to Avoid Trading for All the Wrong Reasons”, such as what happened overnight in Syria, which he believes is a non-event, and that today’s other risk event, payrolls (as well as Trump-Xi) are far more relevant to asset prices:

“Will today’s non-farm payroll report move markets one way or another? Probably. Does the Fed’s plans for its balance sheet, whatever they might end up being, have enormous implications for assets of all stripes? You bet. Tax reform, health care and European politics are among loads of reasons for investor anxiety. Last night’s events shouldn’t be among them.”

Judging by the early rush to BTFD, he is right.

Full note below:

Try to Avoid Trading for All the Wrong Reasons

 

Obviously traders are nervous. We’ve been talking about it all week. But it’s unlikely that the U.S. crippling an air base from which chemical weapon atrocities were launched will be a defining moment in whether markets crack or not. In fact, I thought the initial reaction was ridiculously overdone. 

 

There have been expressions of horror at the attacks the Syrian government carried out on helpless civilians, including children. No shortage of calls for something to be done. By people across the spectrum of political opinion. So something was done.

 

Be careful in extrapolating a proportional response into a therefore inevitable replay of previous Middle-East misadventures just because you’re hoping this will help your bond position go your way.

 

The most laughable explanation I heard for why the market reacted as it did was, “It was so sudden. Did he really think this through? Or have other motives? Is he stable?” Get a grip. You shouldn’t program your algorithms based on not liking the guy.

 

The same people telling me to sell S&P futures on this were arguing a few weeks ago that adverse market reactions to terrorist incidents are always a good buying opportunity.

 

If anything, there have been more bipartisan expressions of support than for anything the U.S. administration has done to date. So it is possible. How often do you get Nancy Pelosi, Chuck Schumer, Paul Ryan and John McCain agreeing on something?

 

And if it leads to an actual comprehensive plan on what should be done in the region, alongside a commitment to consult Congress before any true escalation, all the better.

 

Will today’s non-farm payroll report move markets one way or another? Probably. Does the Fed’s plans for its balance sheet, whatever they might end up being, have enormous implications for assets of all stripes? You bet. Tax reform, health care and European politics are among loads of reasons for investor anxiety. Last night’s events shouldn’t be among them.

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The Next Step In Europe’s Negative-Interest-Rate Experiment

Authored by Thorstein Polleit via The Mises Institute,

The European Central Bank (ECB) pushed its deposit rate to minus 0.4 percent in April 2016: Since then, euro area banks must pay 0.4 percent per annum on their excess reserves held at ECB accounts. This, in turn, has far-reaching consequences. To start with, banks seek to evade this "penalty rate," especially by buying government bonds. 

thors1.png

That inevitably pushes bond prices up and lowers bond yields. Moreover, the ECB keeps monetizing government debt as well. The result is a tremendous downward pressure on the yield environment. For instance, the real (inflation-adjusted) return on short-term German bonds currently stands at around minus 2.5 percent per annum.

thors2.png

Negative interest rates (both in nominal and real terms) contribute to lowering the debt burden of financially overstretched states and banks. In fact, negative interest rates force the ratio between outstanding debt and gross domestic product to shrink. Such a monetary policy benefits borrowers at the expense of creditors. The latter has to foot the bill.

At the same time, however, Eurozone banks’ businesses suffer from the ECB's negative interest rate policy. On the one hand, they find it increasingly difficult to remain profitable in an environment of extremely suppressed interest rates. On the other hand, banks run into higher costs due to a negative ECB deposit rate (and the costs keep rising as the ECB creates more and more excess reserves in the banking system).

Banks are under pressure to impose negative rates on client accounts. Given negative deposit rates, however, clients are most likely to withdraw (at least part of) their deposits in cash, and banks could experience a (huge) cash drain, resulting in a funding gap. They are therefore likely to increasingly push the ECB to end the policy of keeping the deposit rate in negative territory.

A New Experiment

If the ECB relents (and it is likely that it does), it would presumably bring the deposit rate back to zero. This, in turn, would bring all bond yields back up and above the zero line. To prevent the interest rate from rising too much, however, the ECB would have to continue manipulating long-term bond yields. This can be achieved by continued bond purchases.

The ECB can set long-term yields at politically desired levels. It simply declares a certain minimum price for bonds. The market prices of bonds will converge towards the minimum price and will not fall below such a level. By monetizing debt, the ECB expands the outstanding quantity of money, driving up inflation at the same time.

The new regime will most likely look like this: Eurozone bond yields in nominal terms will go up slightly. Inflation will also go up, reaching or even exceeding nominal yield levels. This, in turn, will force real returns (that is nominal yields minus inflation) into negative territory. If inflation does not go up too much, most depositors and investors can be expected to stick to their fixed-income holdings.

The new interest rate regime would indeed be positive for ailing euro area banks: The yield curve would remain sufficiently steep, which should turn out to be profitable for banks in terms of lending. At the same time, the negative short-term interest rates help to debase their liabilities against depositors and investors. In fact, the ECB policy would amount to a large-scale bank bail-out program.

thors3.png

In the light of the political desire to keep the euro together, the ailing Eurozone banking industry can be expected — as a necessary condition — to be bailed out by the ECB. It seems therefore likely that the ECB will end its policy of a negative deposit rate sooner rather than later in favor of increasing inflation. Such a policy will entail an ongoing debasement of peoples' life savings in euro-denominated bank deposits and bonds.

thors4.png

This is the uncomfortable truth of the euro currency experience. As it seems, people in the euro area about to learn an old lesson: namely that unbacked paper money — which is what the euro represents — cannot be trusted. Or, as Thomas Paine put it: “Paper money appears at first sight to be a great saving, or rather that it costs nothing; but it is the dearest money there is.”

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Trump Takes Direct Aim At H-1B Visa Program With Rule Changes

Earlier this year a Trump draft executive order on foreign worker visas was leaked to the press and revealed the administration’s intention to craft legislation prioritizing “the interests of American workers and — to the maximum degree possible — the jobs, wages, and well-being of those workers.”  That executive order was never issued, but it appears that some of the ideas it contained are now winding their way through the Trump administration.

With the press overly focused on “Russian hacking,” while also eagerly trying to put out the Susan Rice fire, they completely missed rules changes implemented by the Department of Homeland Security taking direct aim at tech companies and their excessive use of the H-1B program.  Per The Hill:

Without fanfare, the Department of Homeland Security’s U.S. Citizenship and Immigration Services on Friday issued a policy memo that would make it harder for companies to fill computer programmer positions with workers on H-1B visas. The memo stated that being a computer programmer is no longer sufficient to qualify as a “specialty occupation.”

 

The agency followed up Monday by announcing that it would begin to crack down on H-1B visa abuses by conducting targeted site visits to companies with a high proportion of high-skilled visas in their workforce.

 

“The H-1B visa program should help U.S. companies recruit highly-skilled foreign nationals when there is a shortage of qualified workers in the country,” the agency said. “Yet, too many American workers who are as qualified, willing, and deserving to work in these fields have been ignored or unfairly disadvantaged.”

 

In a separate release on Monday, the Department of Justice said that it “will not tolerate employers misusing the H-1B visa process to discriminate against U.S. workers.”

All the announcements are in step with a portion of the draft executive order, which said the Homeland Security Department would begin conducting “site visits” to ensure that worker visas are not being abused.

Trump

 

Meanwhile, tech companies are definitely growing weary of the changes but aren’t quite ready to openly take on the Trump administration just yet.

“Unpredictability is the thing we’re most concerned about,” said one technology industry official. “We’re keeping a close eye on these policies. We want to give guidance to our employees that may be affected, but we don’t know which ones will be yet.”

 

The official said that the concern at their company was no longer if H-1B visas will be reduced in volume, but whether the entire program might ultimately be scrapped.

 

We’re worried that the whole program would be dismantled,” the official said, adding that the fear was rooted in the direction of the administration’s overall policies and rhetoric on immigration, rather than specific conversations with the White House.

As we’ve pointed out before, large Indian consulting firms are by far the largest users of the H-1B visa program.  That said, most of the jobs created by those companies tend to have lower salaries than those created by the likes of Microsoft, Google and Facebook.  

Tech industry insiders expect Trump will direct DHS, which runs the H-1B visa lottery system, to start a rule-making to re-prioritize the visa allocation to give preference to higher-paying firms. This pits tech firms against the Indian IT-staffing firms.

 

In theory, prioritizing by salaries means visas for more senior, higher-paying jobs will be granted first, and visas for lower-paying jobs (such as those being filled by Indian IT services firms) would fall to the back of line, perhaps not getting allocated at all if demand for the high-wage job visas is strong.

 

California House members Darrell Issa, a Republican, and Zoe Lofgren, a Democrat, are pushing bills that would raise salary requirements for H-1B visa holders. Tech companies generally support those efforts to de-prioritize Indian outsourcers that they claim “clog up” the oversubscribed lottery system with bulk applications.

H1B

 

Seems like this tweet is coming to life, with our without an executive order.

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Clipping Iran’s Wings – Winners & Losers From Congress’ New Sanctions

Authored by James Durso via RealClearDefense.com,

 

Iran’s aviation sector will spend much more time taxiing before takeoff if the Countering Iran’s Destabilizing Activities Act Of 2017 becomes law. The bill enjoys bipartisan support in the U.S. Senate, and the House of Representatives is considering a companion bill, the Iran Ballistic Missiles and International Sanctions Enforcement Act, which also enjoys bipartisan support. 

The Senate bill has three primary provisions: (1) Imposing mandatory sanctions on persons involved with Iran’s ballistic missile program; (2) Applies terrorism sanctions to the Islamic Revolutionary Guard Corps (IRGC); Requires the President to block the property of any person or entity involved in specific activities related to the supply, sale, or transfer of prohibited arms and related material to or from Iran.  The House bill primarily focuses on throttling the supply chain that supports Iran’s ballistic missile program. 

The Senate and House bills have the support of Iran-wary groups, such as The American Israel Public Affairs Committee  and the Foundation for Defense of Democracies who feel the bills do not violate the letter or spirit of the “nuclear deal,” the Joint Comprehensive Plan of Action (JCPOA), as they do not target Iran’s nuclear program.  In his Senate testimony in support of the JCPOA, then-Secretary of State John Kerry stated: “We’re not going to come back and just slap [sanctions] on again, but that absolutely does not mean that we are precluded from sanctioning Iranian actors, sectors, as any actions or circumstances warrant.”  The bills face opposition by JCPOA supporters, such as the National Iranian American Council, and the Public Affairs Alliance of Iranian Americans who feel additional sanctions for any reason will derail the JCPOA. (Sanctions levied by the U.S., the European Union, and the United Nations are usually for the proliferation of nuclear weapons or ballistic missile technology, support of terrorism, or egregious human rights violations.)

In March 2016, the U.S. Treasury Department sanctioned Iranian airline Mahan Air for supporting Iran’s ballistic missile program.  Making Mahan Air a two-time loser, as it was sanctioned in 2011 “for providing financial, material, and technological support” to the Quds Force of the Islamic Revolutionary Guards Corps (IRGC).  Iran Air was also sanctioned in 2011, primarily for transporting goods prohibited under United Nations Security Council Resolution 1803, which required Iran to “cease and desist from any and all uranium enrichment,” and any research and development associated with centrifuges and uranium enrichment. The Iran Air sanctions were lifted to secure Iran’s assent to the JCPOA, but Iran Air and Mahan Air have been active in supporting the Assad regime in Syria, leaving Iran Air vulnerable to non-nuclear-related sanctions in the future.

Iran has no strategic airlift capability, so it has pressed into service its private and state-owned air carriers, Iran Air, Mahan Air, and Yas Air (formerly Pars Air; sanctioned by the UN, the EU, and the U.S.). These carriers make up Iran’s airbridge to Syria and its allies, the Bashar Assad regime, and Lebanese Hezbollah, a creature of the IRGC.  The Mahan Air fleet and the Iran Air fleet are mostly Airbus airframes; Yas Air’s fleet is mostly Russian aircraft

In February 2016, Iran Air agreed to purchase 118 Airbus commercial aircraft worth an estimated $27 billion.  In July 2016, Iran Air and Boeing agreed to the sale of 80, and leasing of 29, passenger aircraft worth an estimated $16 billion, with the first deliveries scheduled for 2018.

Congressional opponents of Iran want to cancel Boeing’s agreement with Iran, but it will be more practical to allow the executive branch sanction the buyer, Iran Air, which will be possible under the Iran Terror-Free Skies Act of 2017.  Thus, Boeing can declare force majeure to avoid contract penalties, and Members of Congress can avoid the bad optics of voting against a large export contract and all those jobs.

How can the U.S. ensure Iran Air is eliminated as a tool of Iran’s apparat of subversion in Syria?

  • When Iran Air flights make their next appearance in the Syrian theatre of operations in support of the Assad regime or Hezbollah, the U.S. sanctions the airline under the authority of Executive Order 13572, Blocking Property of Certain Persons With Respect to Human Rights Abuses in Syria Or, if the IRGC is designated a terrorist organization, apply sanctions to Iran Air as a confederate of the IRGC. The U.S. may prefer to wait until it has achieved its goals vis-à-vis the Islamic State before acting.
  • Boeing regretfully suspends its dealings with Iran Air.
  • Because the U.S. is concerned about the safety of civil aviation, it reminds interested parties that it did issue a license for the inspection and repair of Iran’s civilian aircraft “so long as those services were performed outside Iran so the parts and services could not be misdirected to Iran’s military aircraft.” Iran refused to take advantage of the license, but it will be useful to remind Iran and its surrogates of this when they wave the bloody shirt when tragedy strikes, which is likely given Iran’s poor aviation safety record.
  • The U.S. refuses export licenses for U.S-made components bound for Airbus aircraft to be sold to Iran Air.
  • If Airbus decides to install substitute components, the U.S. places the type certificates for those models, the narrow-body A320, the long-haul A321, and the long-range A350, under review. (The “type certificate” is issued by a regulating body, such as the American Federal Aviation Administration or the European Aviation Safety Agency, to signify the airworthiness of an aircraft manufacturing design or "type." Once the certificate is issued the design cannot be changed, at least not without significant time and expense.)
  • Once the type certificates are under review, the U.S. approaches the countries that are Iran Air destinations and requests that, due to the now-nonconforming aircraft configurations, the countries withdraw landing privileges for those aircraft. A similar approach will be made to countries along those routes with the request that they deny flight permits to those Iran Air aircraft until the type certificate review is completed  (A “flight permit” is the “permission required by an aircraft to overfly, land, or make a technical stop [a stop for refueling or essential repairs] in any country's airspace.”
  • If the Airbus and Boeing options are off the table, Iran Air may have to turn to Russia and China for aircraft. The U.S. does not have much leverage here, but China and Russia will be dealing with a desperate buyer and will act accordingly.  Russia and China are wise enough to know dealing with a terrorist-designated IRGC is what’s commonly known as a “bad idea” and will pile on restrictions regarding the use of the aircraft to give them an excuse when the aircraft turn up in Syria. However, by then they will have been paid.
  • The clandestine sellers of parts for Iran’s remaining U.S.-origin aircraft will price their wares accordingly.

Other considerations

  • Boeing will have to be made whole, as the sale has been factored into its stock price, but President Trump’s suggested “big order” of stealthy F/A-18 Super Hornets may do nicely, thank you. Utilization of the Export- Import Bank of the United States (EXIM) would greatly aid in the facilitation of the sale, and perhaps resuscitating the Overseas Private Investment Corporation (OPIC). 
  • The U.S. should re-issue the license for inspection and repair of Iran’s Boeing aircraft at a location outside Iran. America will do this for its own satisfaction as Iran will ignore the offer as it did before.  
  • Iran Air will be unable to compete with the rival carriers from Gulf countries, which the U.S. can trade for something, maybe in the dispute between U.S. and Gulf airlines over government subsidies.

The winners and losers

  • Winners: Syrian citizens on the receiving end of Iranian guns; Israel, which will get a breather if Hezbollah is hobbled; Lebanese citizens, who will get a breather if Hezbollah is hobbled; Boeing
  • Losers: Airbus; any IRGC smuggling scheme that is using the flights to and from Syria; Iranian citizens, who will lose the chance to travel safely from their prison republic.

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