US Non-Farm Payrolls Preview

All right, very good morning. It is Friday the 4th of September. Hope you're doing well. I thought I would start with a splash of red, new color here going on, given the NASDAQ after rallying for 11 of the past 13 sessions yesterday, things coming undone somewhat. The NASDAQ 100 finishing down over 5%. The other indices not quite so bad, but again, some of the biggest down days we've had in a number of weeks. Of course, some of the mega-cap tech names which obviously have been leading this market higher pretty consistently now for, for the last couple of weeks came off the most sharply. So Apple was down about 8%. You can see here Microsoft down 6.2%, Amazon down about 4.6%, Google about 5, Facebook about 4. Some of those names which have really outperformed recently, like Zoom for example, came off sharply, Tesla and so on and so forth. So yeah, a little bit of reckoning, let's say, for the relative calm I think that's been really observed in markets of late. And I think that in itself is quite telling. It's interesting, always is, after a day when we have price action like yesterday and people start to, uh, you know, it's quite so quick people's kind of interpretation that this is the beginning of the end and that's it now, the bubble's gonna pop, we can't sustain this. Um, I would say, look, you've got to— there's got to be a little bit more to it before I think you can start calling that type of activity. But there are definitely a few things I think we need to be aware of going forward for today's session. So With that being said, let's have a look at a couple of equity charts because there are some— first of all, some key technical levels of which the market has been responding to of late. So I'm looking here at the NASDAQ 100. I'm going to switch us to a daily continuation chart. And in particular, both the NASDAQ and the S&P 500 are quite a key technical level, which is the 21 DMA. Now the 21 DMA, you can see here, as far as the NASDAQ 100 is concerned has been a really quite telling signal for people to buy into the any dip that's occurred. Um, the most recent one was when we had the bottom end of this trend line coming in with the 21 DMA, when we had a brief pullback after the initial break to all-time highs, and what was then also a period of profit taking, and that then created then the next entry point for then the push and the eventual break, which was quite a key level of course around 11283, and then the kind of resumption of this really strong upward trend that we've had. Now the push, push down yesterday, and then in the overnight session Asia was down but certainly not as bad as what we had on the close on Wall Street. The losses were slightly more contained in Tokyo, Shanghai, and Hong Kong overnight, but the 21 DMA pretty much being tested to the tick. Is quite a key area now to keep an eye on here in the NASDAQ. You can see just putting a horizontal line here as well, it was the area of support on the 25th of August, so it will be an important level. Equally so, I'll come back to the Dow in a moment because I just want to bring up the S&P first because the S&P 21 DMA also warrants strong vigilance, if I was going to adopt a kind of ECB phrase. For the equity market because the 21 DMA as well is in very close proximity to where price is trading at the moment. So that would be my first kind of area to keep an eye on if we were to get some further pressure to the downside. And then the next real key area for the NASDAQ— or the S&P, excuse me— would be 3397, basically the 3400 level. Just below there, 97.5 encapsulates that previous high that we printed on the 19th of August. That then was repeated test on the 21st before the break and support level for the commencement of the push higher. And that of course was also the prior all-time high previous to the pandemic. So for me, the 21 DMA in the spoos, but then the 3,400 and 3,397. I know for one, the likes of Sam on the desk, he's been calling that figure for a while, that if he gets a pullback then And that's an area, you know, all things to be considered, obviously reevaluating at the time when we get there, but an area where technically he would like to then just pick up some more for re-entry of the long again. So once more, the, the kind of thinking being that, you know, corrections in markets after we've had a really sharp run-up like what we've had, some would say is a necessary component of a sustainable market rally. You know, if a market just goes up consistently higher and higher and higher, it's almost then the inevitability around a fairly significant and sharp sell-off at some point. So what is healthy then are minor corrections along the way. And, and I guess the question mark is out now, and how today will perform will be quite telling. Is today the commencement of something a little bit more deeper in that correction, or is it just that and you start to see these dip buyers come in? And certainly the 21 DMA will be quite key in those indices. As far as the Dow is concerned, the one I'm looking at here is this rectangle box here. So it— in the futures on the daily continuation chart, around 28,000— 28,052 actually is the figure. But what I'm looking at here is the initial low that we printed in yesterday's session, and that coincides with the low of support on the 25th. And then that was the high on the 11th of August on the recovery, which puts us back down. And also a key level you can see here at the beginning of the year in late Jan before the breakdown on the pandemic situation. Um, so for me, this is a really key area of support as well. So you can see there's some really important areas technically that are very close by here in the major 3 indices. Uh, and one thing I would say is that don't forget it is the Labor Day holiday in the US on Monday. Now, just given the fairly stretched nature of this run-up in equity markets, um, is this an opportunity for some book squaring to kind of rotate out some of these large-cap tech names, uh, and also not wanting to carry any risk over the weekend, do we see some more kind of closing out of these, these positions, i.e., kind of profit-taking. And consequently, if that does break down again, then I'd be looking down around 27,624, that prior high we had at the beginning of June, and an area at the bottom side of the kind of consolidation phase that we saw and the early part of August would be a potential next area of support. So, you know, could we have another heavy down day? Sure, but there's going to be some key breaks. And what I'd be looking to see, that more heavy move down, and certainly the 3400 in case the S&P is a coordinated kind of synchronized break, would need to happen. Obviously we've got payrolls later. I don't really think payrolls is too much of a big deal, but could it act as a catalyst? Perhaps. Under the right scenario. But again, it's this idea that I don't think that we're— we can call at the moment that this is the beginning of the end of the stock market, uh, kind of rally. I think far from it. We've got to see some more evidence of consistency behind the selling, and I think today will be quite key. And I, I would say on the balance though, what makes today a little bit more risky is the fact that it is a long weekend in the States. And typically, in my mind, that tends to add a little bit to the nervousness of wanting to hold on to any positions. So you could see some more of that book squaring taking place. A few other things then to, to look at from an equity market point of view. A couple of charts here. For one, that it was the biggest rout that we've had since June as far as the major 3 indices in a coordinated just kind of push lower overall selling taking place. And again, hence the reason why it's caused quite a lot of media attention. Um, obviously stocks like Apple, given just how sizable they are nowadays, an 8% move is equating to around $150 billion worth of market cap. And you know, these news organizations love spinning these numbers and, you know, how much has Bezos lost in one single day, these types of things. I really think they're quite insignificant and it just kind of sensationalizes the move. I don't really think that those types of numbers are particularly meaningful. Also as well, the other thing is you've got to, you've got to look at the world in a bit of context. I mean, this is looking at the rally we've had. Obviously it's been an almighty one since the trough of the bottom of the pandemic seen in late March. And since that point, you know, the performance of Apple shares. So, you know, if we take back what we've just seen, it only puts us back to where we were kind of mid-August anyway. So As I said, I think we've got to see a little bit more here before we can draw any real conclusions behind just one day's price action. I feel like I'm sounding a little bit like a central banker when I say that. One thing that I thought was quite interesting, and I just wanted to point out, was this. This was looking at something in the FT, and it was talking about insiders offloading stocks. Now, if you're not familiar with this, you can actually track insider activity. So this would be looking at data based on filings with the US securities regulator, excluding sales made for tax purposes through executive pay plans. So basically what this is telling you then is major top-level US executives who hold perhaps some significant shares within a company, what is their activity? And a lot of stock traders What they look at is insider dealing. And what we've seen here is that insiders— so this would be US executives, the figure here capturing stock sales of at least a minimum of $10,000 in their stock holdings in companies with market capitalization of at least $1 billion. And what we've seen is US executives have sold close to $7 billion of stock in their own companies over the last month. That comes in at over 1,000 executives. So as we've started to rally, we've had this incredible move in markets over the last couple of months, um, it says quite a lot when those in charge of these companies at the helm are actually offloading quite a lot of their stockholding. And you wouldn't do that unless you thought that the future was particularly uncertain and that you'd want to cash out your chips at the most optimum level. So I just thought it was quite an interesting thing here because insiders are offloading stocks. We haven't really seen this type of volume since the 2015. So perhaps then a little bit of an insight as to what, you know, these, these execs on the ground foresee about the ability for this market to continue to punch higher from where it is at the moment. Right, okay, some other things then. Obviously we've got non-farm payrolls coming out later. Um, my overall take on non-farm payrolls is not expecting too much from this particular one, as I'm about to discuss. And similar in the US and to the UK as well, I think the coming months are particularly important, and a lot of that is tied to the expiration of various different stimulus packages that have been implemented and help support this recovery you've seen in markets since the onset in, in March, April. As some of that comes to expiration, that's when I think that we're really going to see the telling situation of the underlying labor market and how assured and how fast or not is the economic recovery going to be in, in real terms. So just having a look then at payrolls for today, uh, looking at the actual details, the expectation here on the Bloomberg Median consensus is for 1.35 million jobs. The unemployment rate is expected to drop below 10% for the first time since in March when we saw the initial pop. Expectations for unemployment at 9.8% and average hourly earnings year on year expected at 4.5% is kind of the headline readings. A few different things then, uh, if I look at this here, we've had Obviously the initial reopening of the US, which was occurring, obviously they, they did that very early comparative to other areas globally, and that did have some repercussion, you could say, perhaps in that secondary kind of wave that we saw with the pickup at the time through June, July with those Sunbelt regions. But even that in itself now started to become a little bit more controlled. But nonetheless, we kind of peaked up on on the June print, but since then the number has been decelerating. So the 1.8 million we saw last time out is expected to decrease once again. One thing that Bloomberg were noticing, which I thought was fairly interesting, was that any gains in August are likely to be partially offset by declines in education jobs in particular. If you think about it, in America, and we saw this actually, we use Zoom here amplifies as much as many other companies now in the pandemic era. But Zoom crashed a few weeks ago, and that was when all the kids in the US went back to school because a lot of them are doing it virtually via Zoom. And what virtual learning means then from a school point of view is, you know, think about it, there's fewer bus drivers taking the kids to and from school, there's fewer canteen cafeteria worker staff, there's less teachers that are needed because, you know, you can deliver virtually to perhaps a larger group of individuals and so on and so forth. So, you know, all of these things will contribute to potentially offsetting some parts of this. But another thing to be aware of on the upside, FIGR could be boosted today due to Census Bureau hiring. This is kind of a a one-time anomaly. It happens from time to time, and really it's important to X out that number of jobs to get a more true underlying sense of employment conditions. The figure boosted by Census Bureau's hiring is said to be around 240,000 temporary workers, so if anything, that 1.35 should be more like 1.1 million, for example. What's going to happen here is that data collection, it takes quite a long time for the, for the census to be conducted, and actually it will probably impact the next reading as well. It's not scheduled to end until September 30th, meaning then that October will be when it shows a decline in action— actual government employment in this temporary nature being then removed from the data set. The other thing as well to be aware of is kind of furloughed workers getting rehired as businesses reopen, that will prop up payroll gains. But those reopenings depend on the control of the coronavirus, and this is quite an important thing I think I just want to quickly touch upon. This is just a selection of some real household companies in America, and a lot of these job, job cuts have come after the reference period, so wouldn't be necessarily included here. This report we're going to see today. So you're looking at kind of late August to early September. These, these job cuts are not, um, huge, but obviously the accumulation of all of these job cuts is quite telling. And, and I think more for the sentiment then about employment— employing— or employer conditions, it's quite telling. Now one of the things here is that on Capitol Hill, obviously they're still struggling to really come to grips with what are they going to do in terms of the form of the next level of stimulus. You know, I know Trump managed to do various different executive orders, but at the end of the day, you know, what's going to happen with the number of these artificial and fixed period measures that have helped prop up a lot of people who are still furloughed? And so this is going to be quite key going forward. And actually One thing that I was sharing yesterday was, um, the chaps at ING put together their latest research report and it was looking at the types of shape of recovery. So if I quickly show you, it was kind of looking at this type of scenario, which is where we're at at the moment— a sharp recovery and then a gradual recovery thereon. You've got a recovery that sees then the potential for where we are at the moment to deteriorate slightly before then picking up in towards the second half of next year, and then the scenario where we see a big pull, pullback essentially from where we're at at the moment. I'm talking about general economic activity and economic performance by real GDP here. So the varying degree of pace of recoveries, and what is this contingent on? Well, it's really contingent on two main things: the development of COVID-19 as a virus particularly as we go into the seasonal part of the year when weather conditions will be, um, will be dropping in terms of temperatures and people generally start to get seasonal flu and so on. But also then the speed and success of trying to get a vaccine to market and then also its distribution. And so when overlaying those two things, they've built basically a scenario model where you've got kind of A being with COVID you know, are we going to experience from the most loose, which would be localized type lockdowns to deal with then the economy acting in the most efficient manner, just dealing with locking it down in very small parts as to not impede then economic progress, all the way down to community transmission. Remember, the difference being that an outbreak in an abattoir is a much better situation than a community transmission outbreak, which would be something like what we've seen in the UK in the Northwest, for example. So one factory place where it's contained is very different from an entire community, which is more consistent and widespread in its transmission. And what could that mean? Well, community transmission, as people actually become more indoors, more claustrophobic spaces, that could then lead to national lockdowns. That would be by far the worst-case scenario. And then when it comes to vaccine development, you know, there's obviously multiple different trials that are happening from different pharmaceutical companies at the moment. So could we end up in the best positive case, which is multiple options, um, kind of late approval coming end of this year to roll out then before the summer of 2021? and then social distancing can start to be unwound in the second half of 2021, and the economy can then start to regain some momentum. The opposite would be delays, disappointing phase 3 trials, no actual vaccine emerges until well into 2021. That means social distancing needs to remain in place. That impedes then this mobility, mobility aspect for people to actually start to resume normal activities, and therefore economy and the economic response is very slow accordingly. So yeah, I just thought this was super interesting. I did share these on my, my Twitter yesterday, so check it out. But I think this is why my end point is to link this to payrolls, is why I don't think payrolls now is that important. The Fed have kind of set their stall. We know what the deal is there. They're not going to make any changes regardless of what this figure comes out as. What's going to be important now is what does this figure look like in October, in November, you know, when a lot of these fiscal measures start to be unwound? And that leads us on to then really our man Rishi in the UK, the UK Chancellor. Reading quite a lot about this this morning, and that argument I've just been talking about, about the, um, this kind of— the UK in particular, globally, is going to be one of the first countries in Europe to start unwinding these emergency measures post-COVID. As I said yesterday, this kind of phrasing of there's no such thing as a free lunch, and you know, ultimately you're going to have to pay in taxes, and it's very crude and simplistic. But the idea here is that his job here is he needs to manage an economy, but he also needs to be somewhat fiscally prudent in order to think about then managing it appropriately going forward. So it's a balancing act. But there's a couple of things here that I thought were quite interesting. And for one, politically, Boris Johnson's government's under quite a lot of pressure at the moment. Uh, Sunak has warned that rebels in the UK Conservative Party will vote against the autumn budget if the government proceeds with tax increases. So it's been a particularly divisive, uh, kind of idea here about raising taxes as we start to wrap up and unwind and withdraw the emergency measures post-COVID, this could obviously have some real tangible impact on the actual lives of people in Britain, on the, on the street, if you like. So not only have you had a number of policy U-turns which have hurt the Conservative Party's reputation and therefore their performance in the polls, things could get a lot worse if you start to see internal fragmentation within the Tory Party in itself. So all of this, I think, is quite interesting because obviously there's quite a few other things coming up like Brexit as well to deal with. So just to give you a flavor, uh, Sunak this week ended a subsidy program aimed at helping the restaurant industry. A ban on evicting residential tenants in rent arrears is set to expire on the 20th of this month. Furlough ends in October. Think tanks estimate that as many as 3 million people will still be on furlough at the point at which it ends. 3 million. Soft deadline for Brexit obviously coming at the beginning of October. According to the Times newspaper this morning, senior officials close to Boris see only a 30 to 40% chance of a trade agreement with the EU as it stands right now. Another point, many mortgage borrowers will face the end of their payment holiday. Remember, a lot of people were given the choice then to just, just park their mortgage payments. Yes, they got to pay it later at some point, but while they're under pressure, perhaps being furloughed or no real job security, to just alleviate some of that short-term pain of those payments going out, they're on a holiday. But that's got to come to an end as well. So there's a number of things happening here, and I know the, the pound obviously has been, you know, on resurgent resurgency of the pound over the last couple of months. But for me, that's predominantly been based on the dollar, not really the pound. And a lot of these things I think will start to build up with the UK over the period really, I think, of the coming weeks and will act as a growing fundamental weight on sterling. And particularly, we've had a bit of a bounce of late in the, the Dixie. Of course, if that gets sustained to any degree, and I think there's the there's decent room for a bit of a pullback there in, in cable. What's my overall take here? Well, Germany, as a, as a comparison, have pledged to extend its furlough program into next year as the crisis goes on. But obviously from a fiscal situation, Germany is quite different to the UK. But politically, I just wonder whether, given all of the risks associated with many things expiring all at the same time and compounded by Brexit uncertainty, I don't see much in the way of choice that Sunak has other than to start pushing these things out and extending them for a little longer before we have a little bit more clarity on the economic situation and the Brexit situation. So I wouldn't be surprised if he has to swallow a little bit of a further worsening in the UK's debt situation in order to offset a lot of this because there's also a lot of political pressure as well to manage the potential threat of mass job loss. So yeah, I just thought I'd cover these things. This is obviously one of the main threats then. This is a little snippet from the FT of why this is so critical, is that here are some numbers associated with, with these types of programs that are due to basically end. And the fear here is that many banks are worried about a potential wave of defaults, meaning that without any type of state guarantee, they could be pursuing thousands of struggling companies through the courts. And that's because the government's lending scheme has provided nearly £53 billion to some 1.2 million companies through 3 programs: Bounce Back Loans, guarantees for small business loans, and the Coronavirus Business Interruption Loan Scheme. And if all of these start coming to an end, you know, can these companies legitimately survive the particularly these small, medium-sized firms, which do make up the proportion of the main types of companies that employ people in Britain. So push comes to shove, I think he rolls it over for another month or two at the minimum. But we shall see. Until that comes to fruition, I think it will add a growing potential negative weight to Sterling's outlook in the short term. All right, final few things. Uh, this is looking at crude oil. Crude obviously came off quite sharply yesterday in tandem with equities. Um, looking at the chart here, technically with oil, again, I think perspective is probably warranted. I know we've been generally fairly bullish with oil, and I don't really think that I would turn bearish at this point, just given what's happened over the last 2 days. I do think that as we come down here, we're in close proximity on the low we printed yesterday to the $40 handle. The future is just around 20 cents above that. I do think though that the around $38.50, which was that 10th of July low, uh, also on the low on the 30th of July, and you've got some points before there at around $40, $39.50 as well where the price has previously reacted to. I still think these are pretty good areas of some support. One thing that people are looking at is the volume of crude arriving in China, which is the world's largest importer of crude, that is set to slow according to data from Refinitiv after rising for 5 straight months. But generally speaking, I think from some of the Chinese data we've had, things have been relatively stable. I guess again, exactly the same argument that we were looking out for with, with oil It all comes down to this, you know, the, the shape of the economic recovery. And so therefore, de facto, how these assets will react, particularly with the consumption of oil, the net demand for that product is intrinsically tied towards the expectation of the economic recovery. So the COVID-19 situation, how that is dealt with by authorities, and and the speed of which a vaccine is forthcoming will be very telling then for the performance of oil going, going forward in the medium term. But yeah, a bit of, a bit of profit-taking perhaps. I mean, you know, when you look at oil, these are looking at weekly performances, and you can see this has been very seldom the case over the last 4 months where we've traded negative on the week. The last time we did was back in the transition through July into August, and that also happened as well in that June to July period as well. So yeah, it's been flatlining a little bit of late, uh, but just reversing probably the last 4 weeks or so of gains to, to be pretty scratch at the moment. So again, I'm a little bit reluctant to start putting out new bullish or bearish views. I think you've just got to wait to see how the price unfolds, uh, through today and then going into the resumption of trade next week before we can see about how sustainable, uh, the market kind of reaction was to what happened yesterday more broadly. The other thing finally with the Fed, uh, two Fed officials spoke yesterday, and you'll remember this is before the blackout period. We are now into a blackout period, which means then for anyone new to markets no Fed official can speak now until that FOMC meeting on the 15th and 16th of September. This is kind of their routine in order to avert any type of leaks and rumors and things ahead of the official unveiling of their latest announcement. That September meeting, key of course, a little bit more, um, definitive details perhaps that the market is awaiting in regards to following on from average inflation targeting being adopted as outlined by Powell at the Jackson Hole speech. And also we get our latest update in the Summary of Economic Projections. What these two chaps said then, the final two speakers were Evans and Bostic, and they played down the chances of updated public guidance on the path of interest rates at their upcoming policy meeting, suggesting there would be more clarity on the outlook for the economy first. Now There were some hints that that might not really come until the spring. And so I think that's pretty standard management of the situation. The markets have heard what they need to, a little bit of extra dovish policy maneuvering with the inflation side of things from Powell at Jackson Hole. There is no real way to quantify accurately, I think, about projecting the path of US economic performance if unemployment even inflation, as well as then interest rate predictions over time because of the degree of uncertainty with the number of things that are happening in Q3, Q4 of this year. You know, whether that's the, the US election, of course, what's going to happen with COVID what's going to happen with the vaccine— all of these things mean I think the Fed are right to adopt this kind of more generic blanket statement type approach rather than being definitive, because if they're definitive, they're only going to end up being wrong, and they can't really afford the loss of credibility in that sense. So not too much to interpret, I think, from that. I think that's the prudent approach that they've taken, and perhaps that could be what the outcome is really to the September meeting, uh, that anyone who's looking for more definitive, concrete kind of milestones as to what might indicate in future the Fed to take some kind of action, I think they could be disappointed, to be, to be honest. Um, all right, quick finish off and a look at the calendar. Um, a few things to be aware of then. This morning, Construction PMI in the UK is not really going to be too much of a factor, so really it's all about the afternoon. Non-farm payrolls— don't forget, um, I will be covering non-farm payrolls live with the team on an exclusive webinar conducted via Zoom. All you need to do is go on to the link in the description of this video and on the comment section you can register for that. Still some spots left to join us. It is a capped event. So yeah, join us for that. We'll do a full thorough, more advanced kind of rundown ahead of that, and we'll have all the members on the team on board. So that's really the focal point for today. Otherwise then, the other thing I, I guess I'd be very keen to look at are those key technical levels that I mentioned in the US indices. And yeah, let's just see how things play out at this point. Okay guys, have a good session ahead. Hopefully I'll see you live for payrolls later, and if not, have a great weekend and I'll see you on Monday. Thanks very much.