Markets Await Latest US Jobs Report After Hawkish Pivot From The Fed

Okay, very good morning to you. It's Friday the 3rd of December, and before I begin the normal briefing, just wanted to say a massive thank you to everyone who listens to the podcast on Spotify, Apple. I know on Apple, if you have been a listener on there, we've been trying to aim for 100 ratings and reviews on the Apple Store before year-end, and you guys have already taken us up to 108. So So we smashed through our target. So again, thank you very much. And a brand new episode will be coming out with Piers, the head of trading, myself later on today after nonfarm payrolls if you want to check it out. But what are we going to talk about in this briefing today? Well, get you up to speed on quite a few things to unpack actually, from Fed commentary supporting Powell's kind of hawkish pivot. We've got the update, of course, that we had from OPEC and the seesaw price movement we had yesterday. Of course, a little update on Omicron. Where are we there? US debt ceiling vote that went through last night. You've got an update on US-Iran talks, some Chinese data, the Turkish lira, fresh lows after a downgrade on their outlook to negative from Fitch, the rating agency. So much to talk about, and I'll do my best to keep it as on point as possible. But looking at the overall flavor for this morning, a little bit of a bump up in the dollar this morning actually, and that is putting a bit of downside pressure on both major currency pairs, albeit in a moderate fashion. You can see here EURUSD just breaking down through its APAC lows, just extending a bit of a run then down to the S1 in the futures market this morning. And if we're looking at cable, very respectful of a trend line we've been watching here for quite some time in, in, in sterling dollar. And I'm just going to change my chart sizing so you can see it. This goes back to the peak of price activity on that double top from the 18th and 19th of November We've had a couple of retests, well respected, and again just a little bit of a move downward from initial test of pivot seen in the APAC session as European participants come in and we see some mild strengthening of the dollar. So I guess that takes us into one of our first headlines, and that is in regards to Fed speak. So what's been happening here? Well, more Fed Reserve officials, all voting members, called Bostic and Mary Daly laid out the case for speeding up the removal of policy support amid higher inflation. And of course then this does include, you know, someone like Mary Daly is definitely much more on the dovish end of the spectrum. And so much more coordination happening now, which definitely does cement then the view going into the blackout period ahead of the Fed meeting, which will happen on the 14th, I think it is. For what they're going to do, which is likely pay heed to the fact that they'll accelerate tapering come perhaps in the new year, details kind of pending. So a bit of dollar strength this morning. These comments are all largely yesterday, but kind of ratifies the weekly shift that we've seen from Federal Reserve officials. As far as the equity markets are concerned, worth noting then, we did have a pretty decent bounce yesterday Stocks actually notched their biggest and best advance since October. Some dip buyers obviously emerging at around these lower levels, just around 4,500 in the S&P, after some of the two days of selling that we had seen, particularly dominated by the Omicron variant and the various global outbreak that we're seeing at the moment. I did see and almost joked about on my, my tweet this morning for my rundown that the turmoil may offer investors a chance to position for a trend reversal in reopening and commodity trades, according to JPMorgan strategists. They were talking about this kind of buying the dip idea. But, you know, whenever a Wall Street bank comes out and makes these types of calls, you've got to look at it in context. The bank JPMorgan has always been very dismissive almost of the COVID situation and very bullish for equities. And their chief strategist has always been— it's almost the opposite of Morgan Stanley's Mike Wilson, who's much more perma-bear. The JP guys are much more on the bullish side, so it doesn't come as too much of a surprise, to be quite honest. The other chart, of course, from yesterday that was super interesting was oil. And as you can see here, this kind of downward move that we saw going through, and also an initial release of the OPEC meeting, and then this really big bounce that we had. And actually, by the time we got to about 5:30 London time, we'd taken back the entire move. So we went from, you know, putting this into perspective, uh, oil's been moving a lot lately, but this is a $67 to a $62.50 price and back again. That's pretty, pretty sizable moves actually. And now we're actually trading even higher. We're back up, we've reclaimed close to a $68 handle. We're up about $1.35 this morning. And if you put it on a daily chart, there was an interesting technical level of kind of support we were keeping an eye on. You have this trend line going back down from April, retest in August, and we perfectly respected that on the initial move when the price came down on 30th of November. We briefly broke through that, snapped down to 62.50 before seeing a bit of this reversal in price. You can see here though, this is the kind of context, I guess, on the daily chart for the week. This is when we had the first emergence of the new South African identified variant to where we are at the moment. So all in all, from the peak of multi-year high price action we were trading just around a month ago, we have traded down around 25% in crude oil. So definitely sizable moves. Now, what exactly happened yesterday and what were OPEC saying? Well, this was— let me give you the overall gist. The group agreed to add 400,000 barrels per day of crude to global markets in January. And of course, markets were kind of prepping themselves up for potentially they weren't going to do that, just in light of what we've had from the US tapping the SPR and now this new variant that's on the loose. But the cartel did say they've left the door open to changing the plan at short notice. They stated they remained effectively in session, meaning it can change policy without warning ahead of its next gathering, and that's not scheduled till the 4th of January of next year. What FT are talking about here, and it's something definitely Piers and I will talk about in the podcast a bit more, is whenever you talk about oil, you've got to talk about the kind of geopolitics behind a lot of the rationale decision-making that's happening from these oil-exporting nations. And a decision by Saudi Arabia, who's basically the de facto leader of OPEC, comes after a high-level US delegation held meetings in the kingdom this week. And the long story short, Biden's had a pretty— it has had a pretty standoffish relationship with Saudi Arabia. He hasn't even talked to MBS, has only been content talking to King Salman himself. So a little bit of warming on that front, if you like, on behalf of— led by the US to get more of what they want rather than this kind of just coming out with quite assertive commentary against OPEC nations seemingly has done the job and kept Saudi on board. And they've gone ahead and kept this deal in place. So initially dipped, we reversed on the back of this open kind of commitment that they can change their mind, of course, depending depending on the Omicron developments. On that front, what exactly is happening? Well, one of the latest pieces here is that urgent studies to understand how effective COVID vaccines are against a new virus, um, on a global collaboration may yield some answers in the next few days— 3 days more specifically— as according to the World Health Organization scientist. However, they also put out a caveat saying, but we shouldn't put too high an emphasis on 3 days, this normally takes 2 weeks. So just to kind of put it into a bit of context, as a reminder, the Omicron variant has 30 or more changes in the spike protein, half of which are in the area that binds the enzyme that the coronavirus targets to enter cells then and thus cause the infection. Mutations there can make the pathogen less recognizable to antibodies, and hence the reason why people are very tentative about the efficacy of vaccines in their current form. It's possible that SARS-CoV-2 will eventually accumulate enough mutations to escape antibody detection completely and warrant the need for booster shots, but with a slightly altered formulation, which is what we already kind of know, but that's the kind of status quo at the moment. And that's why you've had companies like Moderna and others talking about updating of the formula to counteract once they have more information on the underlying kind of mutation information on the latest variant. A couple of other things I thought were interesting. One was the South African National Institute for Communicable Diseases, otherwise known as NICD. They've came out overnight and they've released the latest study. It showed the Omicron variant reinfection risk is 3 times, uh, great as prior COVID-19 variants. That's a little bit wishy-washy. They're not specifically saying, because obviously transmissibility between Beta, Delta, Gamma, Alpha, and so on have all been slightly different, but the idea is that this new infection could be multiple times more transmissible than others, is one of the things. Um, the final thing then on the, on the COVID front is Biden came out yesterday. This is when he was outlining his kind of COVID winter strategy. Um, although the president here said he doesn't want to, um, he doesn't want lockdowns, he won't expand vaccine mandates to fight the COVID this winter, um, you did have slightly contradictory as New York Mayor de Blasio, who commented there, should assume that the community spread of Omicron is already taking place in New York City. More interestingly here, what's happening is that in New York they've registered the most daily COVID-19 cases since January. So this is even before the kind of sequenced information about whether or not it's Omicron, but COVID cases are already at the highest that they've been since the beginning of the year, which is when we peaked, if you remember, post-Thanksgiving, Christmas, New Year, last year in the States. So this is going back beyond the summer wave, back to then, and New York cases are right back up there at that level again. So definitely keeping a half an eye on these things at the moment, particularly if then case rate starts to accelerate, if indeed then this new virus variant is more transmissible. In Europe, they've taken a pretty firm hand on how they want to respond to this. One of the departing things from Angela Merkel and now Olaf Scholz has been that Germany has imposed stringent nationwide restrictions. They're now saying there's going to be new curbs, including allowing only people who are vaccinated or recovered into restaurants, theaters, and non-essential stores. And of course, Germany having to take fairly abrasive and strict action given the fact that, um, a low vaccination take-up, kind of circa 70%, which is much lower compared to many European peers has meant then that the spread has been quite, quite rapid in latest case rates. Okay, other things to be aware of. Surprisingly, actually, because this, you know, all over all of the years I've been following markets, normally then as we come to the end of the year, funding for US government, they tend to take it all the way down to kind of New Year's Eve. I remember one year I actually went to Hong Kong to to spend that time with my family. And I actually had to deliver some live squawking at the time from Hong Kong in a hotel because of the fact that obviously most people are on holiday, but the US still hadn't struck a deal and they were gonna shut down at the time. So I do have some not so fond memories of this, but the idea being that they managed to actually get this over the line a lot easier this time all things considered. The Democratic-controlled US Senate last night passed a bill 69 to 28 to fund the government through mid-February, averting the risk of a shutdown after overcoming a bid by some Republicans to delay the vote in a protest against vaccine mandates. The Senate acted just hours after the House of Representatives approved the measure by a vote of 221 to 212, where the Democrats have greater control. Um, so yeah, what does this mean? Well, worst case averted, yes. But you remember before, we were here a few months ago, they kicked the can to December. Well, they've just kicked it to February. So this will just re-emerge as another potential risk on the horizon. But once again, they'll do exactly what they've done here. Um, so it's not really a big deal, I would say. Um, elsewhere, other news, Unsurprisingly, the US and Iran both sounded pessimistic yesterday about the chances of reviving the 2019 Iran nuclear deal, with Washington saying it had little cause for optimism and Tehran questioning the determination of US and European negotiators to really have the appetite to even want to do a deal. Talks did resume on Monday, and if you remember, this is a— this has been the recommencing of talks talks after somewhat a 5-month hiatus, um, prompted by Iran's elections of an anti-Western hardliner as their president. So to be honest, although this doesn't sound particularly great as a headline, I think it's completely as to be expected. They've had a 5-month gap, you've got a new president in power in Iran. This is just a feeling-out session. I guess the only positive you could perhaps look for here is the fact that they open to potentially continuing to talk. That in itself, though, looks somewhat in jeopardy given how pessimistic both sides are on this first encounter. But as I said, I wouldn't have really expected anything else. Final things then, you had some Chinese data overnight. The Caixin service PMI did come in at 52.1, slightly below the expected 52.6. So still expanding service sector in China, but at a slower pace than latest reading amid inflationary, kind of rising inflationary pressures and continuing small-scale COVID-19 outbreaks we've been seeing in various different provinces. And with that kind of zero tolerance policy that China has, obviously impacts confidence to a certain degree. And then another one we haven't really talked about much this week but certainly is still feeling the pressure is the Turkish lira. It has indeed hit a new all-time low of 14 Turkish lira, this week, of course, as President Erdoğan defended his low-rate economic policy. It comes in combination, of course, with the hawkish pivot we've seen out of the Fed led by Powell earlier in the week. And there's other officials, as I mentioned, following suit, which is strengthening the dollar and exacerbating that lira weakness to a certain degree. As you can see from the headline, the latest piece of information is that rating agency Fitch has revised Turkey's outlook to negative from stable over risks pertaining to these monetary policy outlook that's coming from the government's involvement. All right, well, let's have a look at the calendar for today. This morning you do have a few things, but these are final service PMI readings, not expecting a great deal. The real emphasis and talking point of today, of course, is on non-farm payrolls. Let's have a quick look at the graphic here and a few things to be aware of. So economists polled by Bloomberg are expecting a number around 550,000, pretty similar to last month and obviously a bit more robust than what had been a disappointing reading on 3 occasions through really July, August, and September. Um, the unemployment rate is expected to fall to 4.5% as well, and that would leave employment about 3.7 million jobs below its peak in February of 2020. As far as the headline figure is concerned, expected at 550, got a range of 306 at the low to about 800K on the high. Employment gains in November, again, likely to be led by leisure and hospitality businesses, following a pretty similar pattern to what we saw in the October report. Um, although that might be the case, it will be interesting. As I just mentioned, New York is seeing the highest COVID case rates now in January. We've had the first identification of Omicron, and if that does prove to be more transmissible, then obviously leisure and hospitality will be one of the first areas to be impacted if we start to see kind of localized federal, state-led action taken from restrictions point of view. Strong employment gains would add to solid consumer spending manufacturing data and suggesting that the economy was accelerating after hitting a bit of a speed bump in the third quarter. That would put again more pressure on an early rate rise from the Fed on the table. Hence the reason why, for a lot of that economic rationale, why the Fed, of course, in addition to rising and surging inflation at multi-decade highs, want to become more hawkish. But of course, the big elephant in the room at the moment remains COVID-19 and what happens there. And A lot of that clarity might not come until really the actual day of the Fed event. Given that that's about 2 weeks away, we should be much more equipped with how impactful potentially Omicron will be on the US and global economy or not. And then otherwise, in terms of the calendar beyond nonfarm payrolls at 1:30, we also have the CAD jobs data at the same time. We're going to get factory orders and ISM Services PMI coming out at 3 PM. Speaker-wise, ECB President Lagarde speaks at 8:30 this morning. Bank of England Saunders, the hawk on the MPC, at 11 AM, and the chief economist of the ECB at 1 PM this afternoon, with non-voting Fed member Bullard to speak at 2:15. That is it. Remember to check out the podcast if you haven't already done so, just an informal chinwag between me and the head of trading to really wrap up everything that's happened this week to make sure you're completely on top of your game. Otherwise, with that, I wish you a fantastic weekend ahead. All right, take care.