Friday, February 7, 2014

Overnight global market review February 7 , 2014 - news , data and views -- US Non Farm Payroll and Employment Situation Report on tap ...... Surprise to the upside on tap ?

January jobs report: 113,000 jobs added, 6.6% unemployment rate


The American economy once again failed to keep up with population growth in job creation in January, the second poor jobs report in a row. Only 113,000 jobs were added last monthaccording to the BLS, but the labor force rebounded a bit as well:
Total nonfarm payroll employment rose by 113,000 in January, and the unemployment rate was little changed at 6.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in construction, manufacturing, wholesale trade, and mining.
Both the number of unemployed persons, at 10.2 million, and the unemployment rate, at 6.6 percent, changed little in January. Since October, the jobless rate has decreased by 0.6 percentage point. (See table A-1.) (See the note and tables B and C for information about the effect of annual population adjustments to the household survey estimates.) ….
After accounting for the annual adjustment to the population controls, the civilian labor force rose by 499,000 in January, and the labor force participation rate edged up to 63.0 percent. Total employment, as measured by the household survey, increased by 616,000 over the month, and the employment-population ratio increased by 0.2 percentage point to 58.8 percent. (See table A-1. For additional information about the effects of the population
adjustments, see table C.)
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 514,000 to 7.3 million in January. These individuals were working part time because their hours had been cut back or because they were unable to find full-time work. (See table A-8.)
The BLS applied its annual revisions to benchmarks, which in the end didn’t change too much of its analyses over the past year. The impact to the December-January calculations was almost nil, for instance.

January Payolls Big Miss Again At 113K Below 180K Expected, December Unrevised

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So much for the hope of either a surge in January jobs, or a massive upward revision in the December print. Moments ago the January jobs number came out and at 113K, it was a huge miss to the expected 180K, but more importantly, the December number which was expected to be revised much higher was virtually unchanged at 75K, compared to 74K originally. The unemployment rate, which has become largely irrelevant, dipped to 6.6% from 6.7%, just so Obama can get the brownie points for fixing the economy. However, judging by the market reaction this is hardly what the traders think.

Payroll Preview: Who Expects What

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From RanSquawk:
The two most important consensus numbers:
  • US Unemployment Rate (Jan) Exp. 6.7% (Low 6.5%, High 6.9%), Prev. 6.7%, Nov. 7.0%
  • US Change in Nonfarm Payroll (Jan) Exp. 180K (Low 105K, High 270K), Prev. 74K, Nov. 241K
Broken down by bank:
  • HSBC 171K
  • Barclays 175K
  • Citigroup 180K
  • Bank of America 185K
  • Deutsche Bank 200K
  • UBS 200K
  • Goldman Sachs 200K
  • JP Morgan 205K
Today sees the release of the nonfarm payrolls report for January, which follows Decembers’s large miss on expectations at 74k versus a consensus of 197k. The Bureau of Labor Statistics (BLS) has acknowledged that weather conditions had a significant effect on last month’s reading. Ahead of the polar vortex in the US,  adverse weather kept 273k employed workers at home (versus a 10-year average of 166k) and temperatures remained lower than average in January, particularly in the first half of the month. The market reaction to another low reading may therefore be subdued, if it is believed to be representative of weather effects rather than economic fundamentals.
Wednesday saw a relatively strong, albeit lower than expected reading of the ADP report (175K vs. Exp. 185K), often considered to be a strong indicator of NFP because of the two data points’ methodological similarities. However, last month’s reading showed 238k, which versus an NFP reading of 74k represented the largest discrepancy between the two readings since Moody’s began compiling the figure in 2012; the average miss between the two releases is 50k. In terms of other data points, although this week’s ISM manufacturing missed expectations the major regional manufacturing surveys from New York, Philadelphia and Chicago were all better than expected, and the ISM non-manufacturing reading was also higher than consensus, with the employment component rising to 56.4 (prev. 55.6).
In terms of the unemployment figure, last month’s drop from 7.0% to 6.7% was the largest decline since December 2010. Consensus currently points to an unchanged reading this month, however, the figure may be influenced by the expiration of emergency unemployment benefits at the end of December. A proportion of the 1.3mln people whose benefits came to an end will have left the labour force if unable to find work, which if proved true could have the effect of reducing the unemployment rate.
Market Reaction
With the Fed now seemingly on a USD 10bln per-month tapering path, participants may view the central bank as less likely to be influenced by the report than previous months unless the reading falls far short, or far exceeds expectations.
As a result, a strong reading indicative of a healthy labour market will likely see a knee-jerk reaction higher in US equities and the USD, and downside in Treasuries and gold. A reading largely influenced by weather conditions in January could mean the initial fast-money moves will fail to be sustained, although a large beat is likely to support the view of another taper by the FOMC at their next meeting in March. Another drop in the unemployment rate, which would edge closer to the Fed's 6.5% unemployment threshold for the first Fed funds rate hike, is unlikely to cause an aggressive shift towards the view of a near-term rate hike due to the fact the Fed continue to reiterate that the Fed will maintain accommodative policy for some-time to come yet.

Quiet Markets As Algos Quiver In Anticipation Of The Flashing Jobs Headline

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It's that time again, when a largely random, statistically-sampled, weather-impacted, seasonally-adjusted, and finally goalseeked number, sets the mood in the market for the next month: we are talking of course about the "most important ever" once again non-farm payroll print, and to a lesser extent the unemployment rate which even the Fed has admitted is meaningless in a time when the participation rate is crashing (for the "philosophy" of why it is all the context that matters in reading the jobs report, see here). Adding to the confusion, or hilarity, or both, is that while everyone knows it snowed in December and January, Goldman now warns that... it may have been too hot! To wit: "We expect a weather-related boost to January payroll job growth because weather during the survey week itself - which we find is most relevant to a given month's payroll number - was unusually mild." In other words, if the number is abnormally good - don't assume more tapering, just blame it on thewarm weather!
Here, we remind readers that the massively disappointing December NFP number sent stocks soaring. It thus goes without saying that should the January number surge and December be revised higher, that stocks naturally have only one way to go - up as well.
And while the risk on/off algos are dormant for now, the biggest piece of news overnight (aside for the BOE being in cahoots with FX manipulators - more on that shortly) is that the German constitutional court effectively said the OMT exceeds the ECB's mandate, but instead of blocking it decided to send the decision on the OMT to the European Jourt of Justice where it will summarily pass as the inverse would mean the end of the European dream (for some, nightmare for others).
As a result despite brief volatility which saw stocks move into negative territory following reports that German constitutional court says sees substantial reasons to suggest the OMT bond program exceeds ECB mandate, stocks have gradually recovered and moved into positive territory after the ECB reiterated that the OMT programme falls within its mandate. As a reminder, during the press conference yesterday, ECB's Draghi said that it is possible to buy government bonds in secondary markets which is allowed by the treaty. As a result, peripheral bond yield spreads progressively pared the initial widening, with Bunds also coming off highest levels of the session. However EUR/USD failed to recover and remains lower on the session, with analysts pointing to profit taking related flow following sharp gains made yesterday. At the same time this ensured that in spite of weaker than expected macroeconomic data from the UK, GBP/USD is seen broadly flat.
The day ahead holds in store a pretty full data calendar on both sides of the Atlantic. We have German trade numbers to start where analysts are expecting export and import growth of 0.8% and 0.9% respectively. The French trade report follows shortly afterwards before industrial production reports for Germany, Spain and the UK. The Fed’s latest consumer credit numbers will be reported today. In the world of EM, inflation updates are due from Brazil and Mexico while Hungary will report its preliminary December trade. But it’s fair to say that payrolls will dictate the tone of trade today – all eyes will be on how treasury markets react, especially the front end of the curve if we do indeed see the unemployment rate edge closer to the 6.5% threshold.
Overnight headline digest from Bloomberg and RanSquawk
  • Analysts expected the OMT to be declared in line with ECB's mandate in spite of the fact that the German constitutional court said sees substantial reasons to suggest the OMT bond program exceeds ECB mandate.
  • Stocks have gradually recovered following the initial bout of weakness and moved into positive territory after the ECB reiterated that the OMT programme falls within its mandate.
  • Looking ahead for the session, today sees the ever important Nonfarm Payrolls and Unemployment release from the US.
  • Treasuries steady, 10Y yield holding around 2.70% level before report forecast to show U.S. economy added 180k jobs in January while unemployment rate held at 6.7%.
  • Today’s data probably even less predictable than usual as persistently bad winter weather, the expiration of emergency unemployment aid and annual revisions will all come into play
  • Germany’s top court questioned the ECB’s bond-buying plan and asked the EU’s highest tribunal to rule on the legality of the program
  • German industrial production fell 0.6% in Dec. vs expectations for increase of 0.3%; increased 2.4% in Nov.
  • The worst isn’t over for emerging markets after the benchmark stock index sank to a five-month low and the nations’ currencies tumbled, said Templeton Emerging Markets Group’s Mark Mobius
  • Ukraine’s central bank imposed limits on foreign-currency purchases, bringing relief to the hryvnia after interventions failed to, while President Viktor Yanukovych left to meet Russia’s Vladimir Putin
  • Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, according to a person who has seen notes turned over to regulators
  • Some undiplomatic language by the top U.S. diplomat for Europe has rattled relations with the EU and added more tension to the East-West strains over Ukraine’s political crisis; the U.S. suggested Russia’s intelligence apparatus was involved with leaked recording of call
  • Health plans allowed to continue in 2014 though they don’t comply with new Obamacare rules may be extended for as long as three years, Aetna Inc. Chief Executive Officer Mark Bertolini told investors
  • House Speaker John Boehner said yesterday it will be difficult to pass an immigration bill this year because fellow Republicans don’t trust Obama, whose term ends in 2017, to enforce the changes
  • Sovereign yields mostly higher. EU peripheral spreads steady. Asian, European stocks, U.S. stock-index futures higher. WTI crude lower, gold and copper higher
Asian Headlines
Chinese HSBC Services PMI (Jan) M/M 50.7 (Prev. 50.9), the slowest pace of growth in nearly 2½ years. (BBG)
EU & UK Headlines
Following earlier news from the German constitutional court that they see substantial reasons to suggest the OMT bond program exceeds ECB mandate; several banks have responded with their own analysis on the situation, including RBS and UBS.
- UBS say that German court latest move on OMT may be beneficial long term and will be more productive in helping remove uncertainty.
- RBS say that EU court unlikely to strike down the OMT and bund move may fade.
- Citi say the German Constitution Court decision to pass OMT on to European Court Justice is negative, "as it leaves open to question whether the OMT violates the EU treaty. Citi said historically ECJ has tended to a more pro-EU interpretation of the law, which makes it likely, that it will declare OMT to be in line.
UK Industrial Production (Dec) M/M 0.4% vs Exp. 0.6% (Prev. 0.0%, Rev. -0.1%)
- UK Industrial Production (Dec) Y/Y 1.8% vs Exp. 2.3% (Prev. 2.5%, Rev. 2.1%)
UK Manufacturing Production (Dec) M/M 0.3% vs. Exp. 0.6% (Prev. 0.0%, Rev. -0.1%)
UK Manufacturing Production (Dec) Y/Y 1.5% vs. Exp. 2.3% (Prev. 2.8%, Rev. 2.2%)
German Industrial Production SA (Dec) M/M -0.6% vs Exp. 0.3% (Prev. 1.9%, Rev. 2.4%)
German Industrial Production WDA (Dec) Y/Y 2.6% vs Exp. 3.5% (Prev. 3.5%. Rev. 3.8%)
German Trade Balance (Dec) M/M 14.2bln vs. Exp. 17.3bln (Prev. 18.1bln, Rev. 19.1bln)
German Current Account Balance (Dec) M/M 23.5bln vs Exp. 21.5bln (Prev. 21.6bln, Rev. 23.3bln)
In other notable news, SSM draft gives ECB power to supervise smaller banks where necessary. ECB may impose higher capital requirements than those set out at national level.
Ahead of NIESR GDP estimate release later in the session, NIESR raised its 2014 UK growth forecast to 2.5% from 2.0% in November and expects 2.1% growth in 2015.
US Headlines
WSJ's Hilsenrath writes: "traders are pushing out their expectations for when the Fed will start raising short-term interest rates". Saying rate expectations are shifting for two reasons: First, the data have been weak lately and a weak economy means an easier Fed. Second, ever since a rate scare last summer – when investors thought an end to the Fed’s bond buying program meant rate hikes were not far behind – officials have been hammering home the message that “tapering isn’t tightening.” That drumbeat continued Wednesday, when Atlanta Fed president Dennis Lockhart said the Fed was likely to continue pulling back on its bond-buying program, but rates would stay low “well into 2015.”
Basic materials sector supported European equity indices since the get-go, with ArcelorMittal leading the move higher following earnings pre-market. At the same time, less than impressive earnings by Statoil, together with reports of an investigation into potentially improper sales practices by SBM Offshore resulted in oil & gas sector underperforming its peers. In terms of other notable movers this morning, Air France-KLM shares came under significant selling pressure after it was reported that the company said to be studying capital increase before end 2014.
The release of weaker than expected macroeconomic data from the UK failed to weigh on GBP/USD which is seen broadly unchanged and continues to benefit from lower EUR/GBP cross, driven lower by touted profit taking related flow following aggressive short squeeze yesterday amid somewhat hawkish press conference by Draghi. As a result, despite the fact that the OMT is still expected to be passed by the European Court, EUR/USD was unable to recover and heading into the North American cross over remains in negative territory.
RBA raised its June 2014 GDP forecast to 2.75% from 2.5% seen in November and also raised its June core CPI forecast to 3.0% vs. 2.5% seen in November. (BBG)
Goldman Sachs see AUD and CAD falling in the medium-term due to weak capital inflows, with AUD/USD potentially dropping to the high 0.60s in the next two years. (BBG)
India has no plans at present to reduce import duty on gold according to a junior finance minister. This is inline with source comment on Tuesday said that India is unlikely to cut gold import duties to the original level of 4% and the rollback is likely to happen in tranches. (RTRS)
De Beers are to step up South African diamond exploration with an expanded program to start the year. (Business Day)
Syria's Deputy Foreign Minister said today the government would take part in a second round of peace talks on Syria's civil war in Geneva, according to state media. (RTRS)
Rosneft Oil are to increase supply to China by 9mln tonnes for 2014 and continue talks to increase Eastbound crude supplies. (BBG)

* * *
DB's Jim Reid rounds out the overnight news summary
If someone gave you today's payroll number and unemployment rate in advance would you know how to trade it? It’s possible that the answer to this question would be different today than it might be in a couple of months time. Although this week has seen a recovery in risk, especially yesterday, markets are still uneasy enough that the relief of a stronger number would probably outweigh any yield rising or tapering worries for now. Although if DB is correct on the unemployment rate hitting 6.5% today, the Fed will have a communication issue to address even if a declining participation rate is the main cause. Maybe Yellen helps clarify this next week at her first major outing as Fed Chair? For the record DB is expecting +175k on payrolls today with the market at 180k. In terms of the unemployment rate, DB's 6.5% compares to the market's 6.7%. Clearly we have to watch out for the impact of weather again including any revisions to last month's surprise big downside miss. Indeed, Bloomberg highlights that looking at previous jobs reports from the past 18 major winter storms, the BLS has revised upwards its initial estimates two-thirds of the time. There has also been a debate as to the extent of the weather impact in January given that average temperatures in the survey week were the most mild out of the whole month. Although some parts of the US were colder than Mars in January, the survey week was a bit more earth like!
The employment report follows the other main event of the week, namely the ECB meeting. When you look at the price action over the last 24 hours you could be forgiven for thinking Draghi must have cut rates yesterday as the Stoxx 600 (+1.49%) had its best day since December 19th and the S&P 500 (+1.24%) its best day since December 18th. However the ECB decided to hold fire which helped the Euro hit a 1-week high ($1.359). Our economists now think their move will come next month alongside the ECB publishing their latest staff forecasts for 2016. The forecasts for 2016 are coming nine-months earlier than usual which creates additional ambiguity. If projected inflation by 2016 remains significantly below the ECB's definition of price stability, then the ECB would be required, in DB’s view, to act. However our economists see risks that such a forecast may unanchor market inflation expectations. Alternatively, the ECB could opt for an inflation forecast close to target, but argue that the downside risks around this projection are so significant that this warrants pre-emptive action now. Looking at Draghi’s press conference yesterday, the ECB President surprised a few with his cautiously upbeat economic outlook. Draghi appeared to talk down the disinflation risk saying that core inflation was being dragged lower by the decline in prices from the four programme countries, signalling a relative price adjustment in those countries rather than broader deflation. The suspension of sterilization of SMP bond purchases was not discussed specifically but Draghi mentioned it was a tool being considered (consistent with recent media reports).
Overnight markets are trading with a firmer tone, helped by the strong lead from Wall Street. The only exception are onshore Chinese equities (Shanghai Composite -0.25%) after they reopened for the first time since the Lunar New Year holidays. The Nikkei (+2.0%) is leading the region’s gains although still poised to close lower for the week after a volatile few sessions for Japanese equities including Tuesday’s >4% drop. There's been some focus on the RBA who released their latest Statement of Monetary Policy with a relatively upbeat assessment of economic growth in 2015 and 2016. The AUDUSD initially appreciated 0.3% following the RBA’s Statement, but this move was quickly pared. Asian credit is trading a few basis points better but there is some caution after EPFR funds flow data (Bloomberg) suggested another large outflow from global EM.
While we're on EM it's worth highlighting our latest GEM equity strategy note from JP Smith. JP has been consistently underweight EM vs DM since he joined DB 3 years ago and although he thinks that EM might be a little oversold near-term he still feels the structural negatives remain which are much to do with corporate and sovereign governance. In particular he asks in the note whether the authorities in China can ease policy in the months ahead without increasing moral hazard to an extent where it becomes counter-productive and triggers major outflows? JP even talks about if his bearish scenario begins to materialise, there may be increased talk of a RMB devaluation through 2014, which would be bearish for China and GEM. From a macro point of view it seems that one read through from the report are that dis-inflationary forces will continue to come from EM this year. For us this may influence DM central bank policy as the year progresses.
Yesterday’s US data provided little direction though we noted that the US December trade balance widened (-$38.7B vs. -$34.6B previously) mostly due to a decline in exports (-1.8% vs. +0.8%). Compared to what the BEA had assumed for Q4 real GDP, the slightly wider trade balance subtracts a couple of tenths from the initially reported 3.2% growth number according to DB’s US economist Joe Lavorgna. Elsewhere US jobless claims declined to 331k last week, a five week low. Outside of the data, US house speaker John Boehner said that that no decision has been made yet on conditions for approving an increase in the debt ceiling, but confirmed that the Republicans will not force a default.
The day ahead holds in store a pretty full data calendar on both sides of the Atlantic. We have German trade numbers to start where analysts are expecting export and import growth of 0.8% and 0.9% respectively. The French trade report follows shortly afterwards before industrial production reports for Germany, Spain and the UK. The Fed’s latest consumer credit numbers will be reported today. In the world of EM, inflation updates are due from Brazil and Mexico while Hungary will report its preliminary December trade. But it’s fair to say that payrolls will dictate the tone of trade today – all eyes will be on how treasury markets react, especially the front end of the curve if we do indeed see the unemployment rate edge closer to the 6.5% threshold.