217K Jobs Added In May, In Line With 215K Expected; Unemployment Rate 6.3%

Submitted by Tyler Durden on 06/06/2014 08:34 -0400

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In a report that was a complete snoozer, largely as many had expected, in May the US Economy is said to have added 217K seasonally adjusted jobs, virtually in line with the 215K expected, while the unemployment rate remained at 6.3%. According to the household survey the number of jobs added was 145K, not a huge deviation from the Establishment survey.

The number of people not in the labor force declined by a tiny 9K to 92.009 million, also virtually unchanged.

The labor participation rate was unchanged at a 30+ year low of 62.8%

Perhaps the "best" news is that at 138,463 people employed, we have now surpassed the January 2008 prior cycle highs. It only took 6 years.

Algos Waiting For Today's Flashing Red NFP Headline To Launch The BTFATH Programs

Submitted by Tyler Durden on 06/06/2014 07:07 -0400

If predicting yesterday's EURUSD (and market) reaction to the ECB announcementwas easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well.It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).

But the biggest factor in predicting today's market reaction is that economic newsabsolutely, positively no longer matter. They haven't mattered for the past 5 years either, with "markets" moving higher only on hope and faith never on actual data, but it really hasn't been this disconnected ever: so much so that even the big banksare mocking how broken the market's discounting mechanism is.

In terms of what expectations are, the Bloomberg consensus estimate is +215k in the headline (DB: 200k) and +210k in the private payrolls. The unemployment rate is expected to tick up by 10bp to 6.4% and average hourly earnings are expected to grow by 0.2% M/M. Indicators have been mixed leading up to today with Wednesday’s ADP report (+179k vs 220k previous) coming in sharply below consensus while the last few weeks of jobless claims have generally been solid.

Regardless, for all those basing their decision what to do with the market, which is now massively, historically overbought, so much so that Goldman's June 30, 2015 S&P price target is less than 10 points away, don't, and simply BTFATH. After all in a market as rigged and manipulated as this one, where this time is different, nobody can ever lose money: Uncle Fed has your back.

Looking at the overnight session, the search for yield is a continuing theme today but its generally a slow session with many waiting on the sidelines ahead of NFP. Asian credit has reacted positively with spreads gapping in 3-5bp in the investment grade space. Asian sovereign CDS is around 3-4bp tighter. JGB yields are about 1bp lower, and while EM rates such as Indonesia yields are down 3bp. Asian equities started the day following its US and European counterparts higher but those gains have been gradually pared back during the Asian trading session. Chinese equities received a small bounce after the vice-Chairman of the country’s bank regulator said that the Government is considering loosening the 75% loan-to-deposit ratio (Bloomberg), but the Shanghai Composite and HSCEI are now both well into negative territory (around -0.5% as we type).

As for Europe, virtually every peripheral bond is trading near or at record low yields, thanks to Draghi's latest carry trade reveal, with both Spain and Italy touching unseen lows overnight, and in fact Spain traded below the UK: yes, that's how broken the market now is (with all due respect, not much, to Mary Jo White claiming the market is actually quite unbrokne).

Bulletin Headline Summary from RanSquawk and Bloomberg

Treasuries gain before report forecast to show U.S. economy added 215k jobs in May while unemployment rate rose to 6.4% from 6.3%.
Rising food prices helped push Japan’s misery index to the highest level since 1981, while wages adjusted for inflation fell the most in more than four years
With the BOJ looking to drive inflation higher, a squeeze on household budgets threatens consumption as Abe weighs a further boost in the sales levy
With the ECB’s policy toolbox now virtually exhausted and much hinging on whether banks boost credit themselves, failure to spur consumer prices will leave Draghi with little option but to enter the uncharted terrain of QE; some have more hope than confidence that Draghi’s current plan will work
China’s yuan posted the biggest gain in a week in onshore and offshore trading as the People’s Bank of China raised its reference rate by 0.14% to 6.1623 per dollar, the largest increase since Jan. 10
China’s military is improving its military doctrine, training, weapons and surveillance to be able to conduct more sophisticated attacks against the U.S. and other adversaries, according to the Pentagon
Russia’s $400m deal to pipe natural gas across the border to China has rekindled hopes that the two nations will finally build a bridge across the frontier to bring a steady stream of Russian customers to Chinese stores
Denmark kept interest rates unchanged to strengthen the krone after intervening in the currency markets, opting not to follow the European Central Bank back into negative territory
New York’s top banking regulator Benjamin Lawsky is pressing BNP Paribas SA to dismiss one of its top executives as part of settlement negotiations with the U.S. over alleged sanctions violations, according to a person familiar with the matter
Four million people are projected to pay the U.S. penalty for not carrying health insurance next year, about one-third less than previously estimated, after the Obama administration created exemptions from the fine
Sovereign yields lower. Asian equities mixed, with Japan markets little changed, China lower. European equity markets and U.S. stock futures gain. WTI crude higher, copper falls, gold unchanged

US Event Calendar

8:30am: Change in Nonfarm Payrolls, May, est. 215k (prior 288k)
- Change in Private Payrolls, May, est. 210k (prior 273k)
- Change in Manufacturing Payrolls, May, est. 10k (prior 12k)
- Unemployment Rate, May, est. 6.4% (prior 6.3%)
- Average Hourly Earnings m/m, May, est. 0.2% (prior 0.0%)
- Average Hourly Earnings y/y, May, est. 2% (prior 1.9%)
- Average Weekly Hours All Employees, May, est. 34.5 (prior 34.5)
- Change in Household Employment, May (prior -73k)
- Underemployment Rate, May (prior 12.3%)
- Labor Force Participation Rate, May (prior 62.8%)
3:00pm: Consumer Credit, April, est. $15b (prior $17.529b)

ASIAN HEADLINES

Yet another record highs in US stocks, with the DJIA moving above 16,800 for the first time, failed to filter through to Asia markets, with Hang Seng and Shanghai Comp trading lower overnight amid concerns over financial stability in China. Specifically, Chinese regulator (CBRC) said it is considering loosening the 75% loan-to-deposit ratio, although the World Bank warned such reform measures could disrupt growth in the long run.

FIXED INCOME

Expansionary monetary policy announcements by the ECB yesterday, which are expected to add approx. EUR 570bln in liquidity, continued to support further yield curve flattening, especially in the short-end. This was particular evidenced in EU peripheral bonds, with Irish, Spanish and Italian 10y bond yields hitting new record lows this morning. The opportunity to enter carry trade also resulted in credit spread tightening.

EQUITIES

Financials and telecommunications outperformed on the sector breakdown this morning, while the more defensive sectors underperformed, as market participants sought to capitalise on beta plays that ECB’s latest measures are expected to result in. As a result, despite the somewhat choppy price action, amid risks associated with the upcoming NFP jobs report release later on, major EU equity indices traded broadly higher.

Monetary policy divergence between the ECB and the BoE ensured that GBP outperformed EUR this morning, that’s in spite of the fact that Gilts were also dragged higher by Bunds, which therefore prevented curve steepening. Elsewhere, JPY benefited from risks surrounding upcoming NFP and also broad based EUR weakness, with EUR/USD, EUR/GBP and EUR/JPY all trading lower.

COMMODITIES

After rising over 1% yesterday, which was also 1st weekly rise in three weeks, on the back of buoyed inflation expectations in Europe following yesterday’s ECB policy announcements, spot prices remained supported this morning, albeit marginally as markets looked forward to the key NFP.

Elsewhere, copper traded near a three-week low and below the 50DMA line amid concerns that a probe into financing transactions at China’s Qingdao Port will dampen collateral related demand. However according to latest press reports, Qingdao Port chairman said that despite the probe, operations are running normally.

In the energy complex, Brent crude futures continue to recover from their lowest levels since early May, with volumes thin ahead of today’s non-farm payrolls release.

* * *

Jim Reid's concludes the daily summary

Welcome to P-Day. However payrolls have been overshadowed by the ECB's action yesterday and its fair to say the package of moves will be debated for some time yet. We'll go through the package below but our first reaction is that the move is likely to steadily increase the wedge between financial asset performance and economic fundamentals and prolong the existence of this theme. As we discussed yesterday, its nearly 7 years since the ECB first intervened aggressively to try to free up bank markets. Would anyone have guessed the combination of events that has occurred since? ie extreme global unconventional policy still continuing to this day, 5 years plus of zero interest rates, rampant financial markets, multi-century all time lows in yields and the weakest economic recovery on record bar the Depression. Everybody would had a chance of getting some of this narrative correct but I doubt anybody would have predicted the combination. Its a unique cycle and as such its one where uncertainty/visibility is high even if volatility is low thanks to central bankers. Its amusing to hear central bankers warn about complacency in markets which if present is largely due to the impact of their policies.

Anyway, for markets, what we were looking for from the statement/press conference yesterday was that the ECB wasn't done yet. That's a pretty difficult measure for Draghi to actually deliver given internal politics but he did stress they can still do more which will keep the QE hopes alive and stop markets aggressively shorting Draghi's resolve. Overall I think the measures are more market friendly than economic friendly though. Monetary policy works with long lags and even if these measures were to stimulate activity/inflation (which is still debatable) we might not see it in the data until well into 2015. The clamour for more stimulus is likely to emerge well before that. However Draghi has likely bought himself some time at least.

Our economist's take on the measures is on the cautious side even they think it was a major package. There is some concern that drop in the cost of funding won't find its way to the real economy. They do think that buying time is not a waste though and that the ECB might be hoping that by this winter, a more hawkish sounding Fed – helping to depreciate the euro – and some mechanical re-acceleration in inflation will relieve the pressure and avoid a discussion on Fed-like QE. But they do note that the ECB opened the door to what our economists call “private QE”, referring to “preparatory work on ABS purchases”. They are not convinced its very imminent though. Here

It’s interesting to read their initial thoughts on the new "TLTRO" - the impact of which remains uncertain, for four reasons: First, there is nothing in the documentation which was released yesterday which would prevent banks from using the proceeds to accumulate more government bonds, at least for the first 2 years (they would merely be forced to pay down the TLTRO half way through the operation if they fail to step up their lending to the private sector). This is at odds with Draghi’s statement in the Q&A in which he made it clear that the package is not designed to incentivise further “carry trades”. Will we get more conditionality down the line to stop this?

Second, substantially reducing banks’ medium term funding cost can be fully passed to final borrowers only if banks consider that they are comfortable with the current level of their interest margins on lending to the private sector. They have been increasing massively since mid-2012. Banks may want to raise them further, either because they consider that lowering the borrowing rate would not properly remunerate their credit risk, adjusted for the capital charge entailed by this type of activity, or because they still need to organically grow their capital ratio. Third, we don’t know the elasticity of the demand for credit to changes in borrowing rates, but in a context of a preference for deleveraging in some segments of the Euro area, this elasticity could well be lower than usual. Fourth, we should not forget that banks need to pay back the ECB EUR 450bn by February 2015, as the two LTROs expire. Even if they were to use the entirety of their EUR 400bn initial allotment in the TLTRO to fund this, there would still be a “net gap” of some EUR50bn. In a cynical view of the targeted LTRO, it could be considered as simply a 4 year extension of the existing LTRO, at a slightly cheaper cost (25 bps against c.65 bps) and with more visibility on the final cost. Seen in this light, it looks less innovative. For more on yesterday's announcement please read their report.

I was at a big DB macro dinner last night and most clients and DB participants felt that the ECB had prolonged the carry trade whatever the scepticism over the effectiveness of the policy measures for the real economy. So this type of thinking might dominate in the near term. Looking at the reaction of markets following the ECB, the carry trade was indeed favoured with Crossover (- 13.5bp), Main (-3.5bp) and US IG (-2.0bp) credit indices all closing tighter in one of the strongest sessions since February. Carry currencies such as AUD (+0.68%) and MXN (+0.43%) enjoyed strong gains as did the most of the EM rates complex with Hungary (-15bp), Russia (-10bp) and Turkey (-25bp) recording the best of gains.

It was an interesting day for European rates, with core yields closing about 2- 4bp firmer after initially selling off. In terms of the euro, after dropping a point after the ECB announcement EURUSD ended the day sharply higher (+0.45%). DB’s George Saravelos thinks that the squeeze higher in EURUSD can be sustained given his view that the ECB has not surprised in terms of quantity, quality and price of money provided beyond what the rates market had already priced. Indeed looking at the short end, core yields were relatively unchanged and closed the day around 0.5bp to 1bp lower. In the commodity space, gold had a much needed rally (+0.78%) and brent rose 0.36%.

Clearly much also rests on what happens with US rates and today's payrolls is the next big test. The Bloomberg consensus estimate is +215k in the headline (DB: 200k) and +210k in the private payrolls. The unemployment rate is expected to tick up by 10bp to 6.4% and average hourly earnings are expected to grow by 0.2% M/M. Indicators have been mixed leading up to today with Wednesday’s ADP report (+179k vs 220k previous) coming in sharply below consensus while the last few weeks of jobless claims have generally been solid (including yesterday’s jobless claims report, the four-week moving average is now 310k, which is the lowest level since June 2007 according to DB’s Joe Lavorgna). Joe also notes that Continuing claims are down five weeks in a row and have fallen in eight of the last nine weeks—they are now back to levels last seen in October 2007. If we do get a greater-than-200k payroll print today, it will be the fourth consecutive month that this has occured. The last time that payrolls managed to put together such a streak was in January 2000 according to Bloomberg data.

Turning to the day ahead, German industrial production and trade are the major data releases in Europe. The ECB’s Constancio will be speaking today in London. Later in the day, US payrolls are the main event. The Fed’s consumer credit report rounds out what has been a busy week.

Catharsis Ours

Friday, June 6, 2014

Broken markets update June , 2014 -- Algos Waiting For Today's Flashing Red NFP Headline To Launch The BTFATH Programs

217K Jobs Added In May, In Line With 215K Expected; Unemployment Rate 6.3%

Algos Waiting For Today's Flashing Red NFP Headline To Launch The BTFATH Programs

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