Powell Disappoints The Bond Market As OPEC Hold Fire & Markets Await US Non-Farm Payrolls

Okay, very good morning. It is Friday the 5th of March, so I hope you've had a good week so far. And definitely, I think this final session of the week has much in store, perhaps look forward to, and of course culminating from a data perspective with non-farm payrolls due at 1:30 this afternoon. So we're going to talk about that amongst other things, because yesterday we saw a bit of a rerun of recent market moves that have really caught attention the last two weeks, which is the Yields rising again after Powell spoke, consequently putting some downside pressure on the likes of the metals markets. So gold broke that key $1,700 in the futures. Uh, dollar strength and equity weakness. So lower close on Wall Street, losses around 1.34%. The S&P down 1.1%, and again, an underperformer, the NASDAQ, and tech stocks down around 1.73% in the NASDAQ 100. Um, before I get going, don't forget that Piers and I are going to release our latest Market Watch podcast. We're going to do it a little bit later because we just want to see how payrolls comes out. So that'll be coming out probably for a release at the end of the day, so you'll have that to check out over the weekend. Remember, you can access it on any of the major podcast platforms, but typically Spotify or Apple Podcasts if you're using those. Just search for MarketWatch Amplify Live. But let's get into it and look at this morning. And equity index futures marginally lower, albeit off the lowest levels that were seen yesterday in the wake of some fairly heavy selling pressure that was emerging in the latter hours of US trade. US 10-year in the bottom right-hand corner remains, remains fairly depressed around the 1.32 handle. So holding on to the, the move higher we had in yields yesterday. And what does that look like on a yield perspective? Well, this is the US 10-year yield, and after what was a fairly condensed yield movement of around 1.4 to 1.45 for the, the best part of the first half of the week. Things certainly started to liven up yesterday and putting us over and above then where we were at the peak kind of last week, and therefore now upside 1.6 and then 1.65 brings in that kind of peak of yields that we were trading at the beginning of February of 2020. So pre the full-blown pandemic. So technically now It does look kind of more bullish in that sense, that there's the next kind of logical area of resistance from a yield perspective, perhaps not for a little bit higher from where we are at the moment. And certainly payrolls could be an interesting trigger for this. From a currency point of view then, with the yields, dollar continues to increase in step in a correlation move with that. And the DXY now above the peak that we had So year-to-date highs now for the dollar index. And that does put us— you can see this kind of line that defines the current price of the Dixie at 91.74. That is pretty much exactly where we were at the trough of market prices in September of 2020, where we were seeing persistent declines in the dollar on the back of this kind of lower for longer mantra of Fed policy that was keeping the dollar on the back foot for a considerable period of time. So the reversal continues. And quite an interesting area again on that, that test where we are currently trading this morning. So definitely the major pairs warrant watching. And if I was looking at the euro, uh, we are at some fairly interesting levels on the daily chart. So this is the daily, and just looking at 1.1960, uh, this was the low that we printed back in the early part of February, but also was the relative highs that we were printing in August of— so last summer, 2020. And we're just having a threat at around that level at the moment. So technically does remain quite a key level to see where we close today, this week, just given the dollar strength, as you can see here, is putting— put downside pressure on this major currency pair at the moment. In the relative as well divergence of macro fundamentals behind the, the relative slow reopening expectations for Europe against this kind of continuation of growth outlook for the US, and very much underpinned, if anything, on the quite contrasting situations with COVID at the moment. From a virus perspective, Europe still seeing— having some issues trying to get it under control. In the likes of Italy and Germany, we saw them roll over their lockdown just 2 days ago, but then also on the vaccination side as well, being particularly slow to administer those comparative to both case rates dropping in the US consistently in combination with a sharp acceleration in their vaccination program. So that would make you feel more top level, more bearish here, and particularly the sensitivity at the moment with this yield play could open up the door for deeper moves here in the coming sessions, if not the session today. So that's key level on the currency markets to have a look at. Powell did speak yesterday, and you know, what, what did he say? Well, he basically fell short of trying to rein in bond yields, which obviously have been the real focal point of markets. His language actually was just a reiteration. I mean, he— I was reading some commentators saying he couldn't really make it more clearer that they're just going to continue doing what they're doing, and you know, disinflation kind of market being spooked by it at the moment. They're more— they are looking at that, but they're looking at the job situation as well, which does make payroll particularly important today as a metric that defines really their policy decision, uh, kind of process. And some were of the view that it was real yields, not inflation expectations, rising as far as yesterday was concerned. And that could be because the markets think the Fed will get behind the curve and eventually will have to tighten even more than if it did so gradually. And perhaps then that's some rationale behind what might have spooked the market a little bit, uh, yesterday. Also though, um, helping the yield move was a really big acceleration in crude oil prices. So before we start talking OPEC and what exactly did they do, let's just have a look at the price. So yesterday, going back to yesterday morning, I mean, at the, at the low of the actual a late European morning, we were trading sub-$61, and here we are up knocking on the door of $65 now, WTI. And from a daily continuation point of view, um, we're very close proximity now to testing up and around the year-to-date high we had in 2020, before then the kind of Lunar New Year and China outbreak in Wuhan of coronavirus. And then just above there, $66.60, resides then the 2019 high that was seen in April of that year. And going back further, should we at any point in the future push beyond there and go north of, say, up to $67 and above, then we wouldn't have traded at those levels since 2018 when we were right at the peak of that recovery in oil that was seen in the years prior to that. So again, recapping, I know most of you were, were on top of that, and definitely a good day for our, our traders on the oil front. Um, but just to get you up to speed, so yeah, assisting a little bit of that yield move, I think accelerated in combination with Powell, was then the prices of oil are moving higher. They, they chose not to relax supply curbs, and this comes even as global growth continues to kind of pick up in terms of the general view that's underpinning that, that yield move. So it did confound widespread expectations that the group would loosen the taps. And if anything, then that's going to put in the short term more immediate inflationary pressures into the system, given the fact that energy prices have been consistently rising very aggressively. The OPEC+ group decided against the collective 500,000 barrel per day increase in supplies, but Russia and Kazakhstan managed to wiggle themselves a small production raise of 150,000 barrels per day together for April. And what, you know, why do those things happen? I mean, it's a bit of a gimme if you're kind of in golf analogy. It's kind of like that 150 really doesn't mean anything. It's just a kind of olive branch, probably from the likes of the Saudis to get Russia on board to go along with the agreement that they came to in the end. So it's kind of like, okay, we'll give you this little gift, um, just of goodwill to keep you on side for the moment. Um, Saudi Arabia, they will maintain their own voluntary cut because that was the other component of the 1.5 million that was under the spotlight. Um, they're going to keep that for another month. Their view is that this time around, higher prices will not lead to a big increase in output in American shale drillers. If you remember, I think it was going back to really 2014, 2015, that was when the emergence of shale in America, and US oil production was picking up very quickly. And OPEC had that, that opportunity, if you like, to take some kind of action. And what they decided was to really flood the market, oversupply it, to force the price lower, to try and crush the somewhat emerging US shale industry. And they really— that backfired big time. So at this point In time, I think they're probably right to a certain extent. They can hold off a little longer because there's been a kind of chronic failure of investment in US infrastructure on that side because of the pandemic as well, in particular. So that in itself is probably going to help tighten supply and squeeze prices even higher in the future, despite the ongoing improved growth outlook on the reopening of global economies. But the idea then that they're going to be able to really ramp it up in terms of a lot of the shale rise over the period of that last 5 years have been really built on credit and borrowing money at extraordinarily low rates to try and, you know, take advantage of the situation. So I don't think necessarily that would happen so quickly this time around. So perhaps the Saudis feel comfortable that American shale drillers are not going to be able to see big immediate increases, so they can roll over for the time being. Analysts at Citi made a good point, I thought. They said that oil rising to these levels will likely increase the strains in OPEC+. And the reason for that is that there's obviously a number of countries which financially, from a fiscal perspective, are under pressure in terms of managing their economies in a, in a pandemic, post-pandemic environment. And so they just want to be pumping and making as much money as possible. So yeah, this type of thing can't last forever, and neither will it because the fact that, you know, going into the second half of 2021, obviously the reopening of economies will mean then that they can opt to relax these supply curbs. But as we know, the geopolitical nature of OPEC, given its combination of countries with quite wide-ranging different political objectives and fiscal situations, it could be something to monitor going forward. On the overnight side of things, just running through really the headlines, we did have China state that it's targeting at least 6% growth this year, unveiled at the National People's Congress. The new target briefly boosted Asian equities generally, which were as a region, as a whole, a little bit softer following the weaker US handover. But stocks then fell back and retraced, with economists saying that the target was relatively modest compared to recent years, so being a little bit more conservative on that front. Otherwise, other news, the US Senate voted to take up the $1.9 trillion relief bill backed by Biden, and that sets off now the debate expected to take place over the weekend. Chuck Schumer, the Senate Majority Leader, pledged to pass the relief package in the recent days, so this is looking like it's, it's going to go through without too much in the way of any major issues. And then just a quick mention on this, um, in the context of the fact you have got the ECB meeting policy meeting next week where they are expected to release their updated economic forecasts as they do so on a quarterly, yearly basis. This was because Bloomberg released their Economist survey, which they do generally the week before the ECB meeting, and it shows that the ECB will step up its pace of ECB asset purchases to counter rising bond yields that risk hurting growth prospects in the euro area. That's at least what these economists on a whole are predicting. More than half the respondents expect €1.85 trillion program to be extended beyond its current end date of March 2022. So it's not that they're going to increase the size of the envelope, it's how long it's going to be in place for, which I don't think comes as a surprise at all. The average extension of that, um, on a majority basis was that they can extend it out by a further 3 months beyond that to the summer of 2022. So I don't think it's too shocking. Looking forward to today, obviously it's, it's all about nonfarm payrolls. The calendar for the UK European morning is pretty much null and void. There's nothing really going on. You had German industrial orders earlier, which did exceed expectations, um, 1.4%. Um, but this January data, that was double the consensus. But as you can see from the euro chart, very little movement. Uh, I'd say definitely more of a dollar dynamic to trade these, um, dollar-based currency pairs today more than anything. And then we look ahead to non-farm payrolls, of course. And on a very top level, US growth likely accelerated in February as more services business reopened amid falling COVID-19 cases, quickening vaccination rates, and additional pandemic relief money from the government. And this does put us, you know, with payrolls, it's not just about today's figure, which of course I think markets intraday will be sensitive to just in the context of the yield, uh, kind of focus at the moment and the trigger point that that is having on global assets in the short term. But the reopening of America is going to continue apace, and so this jobs data should start to meaningfully pick up over time, and hence the reason why further fueling this whole kind of growth outlook in your move as well. Um, the headline change in non-farm today is expected at 182,000. There is a bit of a range on the street And actually, I just saw some of the primary dealer estimates come up on my screen, and Citi are going on the high end for +410,000. On the bottom end is RBC, and they're going for -100k, but the consensus is for around a 200k print roughly. So one of the things to be aware of here, well, economists— some interesting points to note— economists saw no impact from the mid-February deep freeze Remember that definitely hit the densely populated areas in the south, like the state of Texas. But unseasonably cold weather last month, especially in the Northeast, and production cuts at auto assembly plants because of global semiconductor chip shortages likely shortened the average work week. So just be aware of that kind of nuance in the, the other underlying parts of the report. One of the things we always do, of course, when we're building up to the labor report is look at what have the other job indicators been generally telling us as a signal as how today's report might come out as, uh, probably the major ones that we look at. So things like ADP was a negative, uh, it missed, um, by a fairly large margin, printed at 117,000 below the expected 177,000. Uh, on the flip side though, for the ISM, um, Manufacturing PMI, the employment component was in fact its highest level since March 2019. And this Services PMI employment component was in a positive expansionary territory above 50 for the 4th time in the last 5 months. So a bit, bit mixed. I wouldn't say I'm going into this with one preconceived idea or another. The thing that I think is particularly interesting at the moment is, as Per just mentioned, the yield, the dollar, and then the subsequent reaction effect that that could have then on other global markets in a similar fashion to what we've been seeing yesterday and really over the last 2 weeks. So yeah, some, some critical levels here to have a look at. Upside, oil resistance. Downside, EURUSD quite key with some room perhaps upside for dollar index technically to move higher again. And then if that does materialize, then in yields do move higher, then gold could be susceptible for some further weight despite its relative kind of bounce we've seen in the overnight Asia-Pac session. Uh, the low— well, let's just have a quick look at gold. Gold was, uh, was a chart we've been looking at all week really, and we've been looking at it on the basis of this kind of technical picture and we've had this kind of descending trend line, the orange rectangle bar, which was previous support and resistance. And we'd been in a fairly tight kind of range-bound trade over the period of the last 2 sessions. And I said really yesterday things really livened up and we had a bit of a rerun of market activity from last week. And with a lot of strength, we just smashed through that 170405 level, which was a really strong level which we were, we were watching here on the desk all of the last 24 hours. And when that broke through, traded very heavy, quick $5— well, $10 run on the back of that, and then spilled over again when equities were getting hit last night when the selling pressure on the Dow was really picking up pace at the time. Overnight in Asia, they followed that through. We did print a low down at 1683 before we've had a bit of recovery back up. Near term here, the 1700, um, 01.5 is the pivot, is probably an area to have a look at from a technical retracement point of view for an area of resistance for price for the time being. All right, that is it. Gonna leave it there, um, let you guys get on with it. And yeah, remember to check out the podcast if you're watching this delayed on YouTube. Really appreciate it if you could, um, hit that like button and subscribe to the channel. Lots more content coming as always, and I wish you guys a great weekend ahead. All right, take care. See you Monday.