US Non-Farm Payrolls Preview

Okay, very good morning to everyone. Happy Friday, the 4th of October. Non-farm payrolls, of course, coming up in a couple of hours' time. That's going to be one of the main focal points of what this briefing is going to contain, but also there's a couple of other things to, to share. Obviously, the buildup of the employment indicators that we've had this week that gives us a bit of an idea of how payrolls might perform and importantly how markets might react. Uh, we're going to have another review kind of to bookend the week of where we started to where we are now in terms of the market's positioning and expectations around the October rate cut and how that has been changed. Um, then we're going to have a look at, uh, some news out of Apple and an update on Brexit. And that's my side. And then Sam's going to come on and talk about the technicals a little bit. But first of all, just having a look, I was off the desk yesterday afternoon, but I'm already up to speed in regard to the things that have been going on. And it almost as if the, the penny's now dropped that given the fact that the ISM non-manufacturing was also weak following on from what we've had in ADP and ISM manufacturing, a continuation of yields declining. So I can see the T-notes saw a pretty decent kick on the upside yesterday, as we'll look at the expectations now priced in at nearly 90% of a 25 basis point rate cut from the Fed in a couple of weeks' time. And therefore equities finally responding. Interestingly though, just looking at the S&P 500, we did look at this chart yesterday from the, the technical setup in regard to that that Sam North trendline, I'll call it. Although that had a bit of volatility yesterday initially, I imagine at the open where it whipped through quite aggressively, ultimately the level holding and we just continued to recover some of the lost ground that had been seen in the first back-to-back 1%+ consecutive day sell-off, the only one that we've had in 2019. So, you know, we were kind of talking about this right at the beginning of the week, the idea that, you know, I think the worser it gets, there comes this inevitable point of which then the market tends to respond in the equity space at least. It's about finding then the appropriate— I think there's always left the room, if you like, for the market to pull back, but then ultimately finding that area of where you get a pretty decent respond and people never to become in short-termist of course looking to just buy the dip at that point. I think now, given the move that happened yesterday, I'd say people are probably more likely to just sit on their hands and wait now for non-farm payrolls before committing any further. But if non-farm payrolls does come out on the weak side, let's say a headline figure sub-100 and lower average hourly earnings, well then not just that the Fed got a cut in October, then they've probably got to squeeze a December cut as well. and then we break this current communication line of a mid-cycle adjustment to something more meaningful, to easing. And therefore, you've got to think, under that circumstance, equities might well just pull back a little higher again. If that did happen, obviously, the— you'd be just flipping basically what the argument we were talking about, the downside areas of significance, to the upside, and be targeting around that 37 to 146, that zone that we were eyeing on the initial break that was really initiated after the ISM reading back on what, Tuesday, then the ADP and the eventual break that came as the kind of near-term areas of significance on the upside. But away from the S&P, I know Sam will go into that in more detail on the other indices, um, for this morning, dollar index is basically flat. That's completely, uh, regular activity, I'd say, ahead of the major labor report. So both EURUSD and cable are in a bit of a holding pattern. That's usually the case going into 1:30. Elsewhere, oil just up a touch, $0.18. Pretty quiet overnight in Asia. Of course, China still remains closed for that 70th anniversary, which has impacted their, their markets all week. The US 10-year just creeping up a little bit. The whisper number has been circulating this morning for non-farm payrolls, and it's around the 125,000 mark, so substantially lower than the consensus estimate of 146,000 that's on the street at the moment. All right, well, let's go into a couple of things then, and, uh, I'll look at the fundamentals from a top level. I'll leave the technicals to Sam shortly. First off, talking about the ISM manufacturing number we had earlier this week, and of course this was the real This was the big one really, because it really was the first piece of meaningful information that we had this week. And just let me show you what that meant for markets' expectations of the probability of action happening from the Fed in October. You can see here on this white line, this is marking the implied probabilities of a rate cut of 25 basis points, and it exploded, um, yesterday after we had the ISM Services one. It was a similar reaction effect that we saw. If I was to have this extended, it was a move from 40 pretty much to 65. ADP had a little bump as well, and then another 20, 25% up to 95% at one point yesterday immediately after the data. So with ISM Manufacturing, um, that came in at 47.8, and that was of course weaker than expected. The latest reading pointed to the steepest contraction in the manufacturing sector since June of 2009. So these ongoing trade war with China and other counterparts globally has meant that we're seeing continued pressure on manufacturing activity in the States. You can see this isn't like a one-time shock, this is a continuation of a deterioration uh, in this situation and getting further into contractionary territory. Of course, having had the last two numbers get below 50, and as I mentioned, the lowest in basically 10 years. Got to go back all the way to the kind of depths of the financial crisis. Obviously it was considerably worse than where we are at the moment, but having broke that lower bound right at the beginning of 2016 puts us back down to June '09 lows. Now the other number that we had that kind of fit, fitted the narrative was ADP. This is often given quite a large weighting in the market given its fairly correlated, or should be, nature to the overall government's labor report that we'll get later on today. This is of course looking at private payrolls. This came in at 135,000, expectations were for 140, but it was also recipient of a downward revision to the prior month as well. So again, again indicating some weakness in the jobs market. And then we had the Services PMI confirmed at 50.9. Um, well, this was actually the Markit figure. Uh, I'll get the ISM one up shortly, but the idea being that the US services sector grew at its slowest pace in 3 years during September. So all of that contributing to that number which we were just looking at, uh, it did hit a 95% highest pared back slightly. The Bloomberg measurement is always slightly more higher percentage than the actual CME Fed Funds Futures, which is the main one the market will look at. But again, residing at 86.1% probability now that rates will be taken to 1.5% to 1.75% in a few weeks' time. This is that very useful crib sheet that I always kind of use or look at and recommend you guys do the the same in the build-up to non-farm payrolls. Some of the guys at the moment on the career training program, in the very first stage of your, your development, in the coming weeks I'll start to give you some more advanced lectures in regards to how to interpret and how to prepare for major economic data. But to give you a bit of a top-level summary, non-farm payrolls is due on the first Friday of every month, barring an exception if there was a bank holiday or something like that. What happens then in the buildup to that Friday report is that in the preceding few days we get a number of, um, US economic data, some specifically on jobs and some like ISM Manufacturing and Non-Manufacturing that contain a variety of different constituents. Of those constituents, you probably saw with ISM yesterday, you have things like, uh, new orders, inventories, prices paid, but employment— the employment constituent is the one that's particularly interesting because it gives us a bit of an insight as to, on a broader national level, for the manufacturing or non-manufacturing sector, what was the underlying employment conditions for those areas. This then overlaid by things like Challenger Job Cuts, which typically comes out midweek on a Wednesday as a prelude to ADP, that tells you the number of job cuts within specific sectors in America. Then you have things like the jobless claims. So initial and continuing jobless claims to see how many of those who are actively seeking employment and how many of those are looking to then take benefits from the government. University of Michigan, how confident are consumers? Are all, all of these numbers basically are wrapped in to give you a more accurate sense because they're all monitoring the same survey period that the government report we're going to see later is also looking at. So if anything, if we can understand how that data this week has come out, we can then start to gauge on the balance. Are we expecting the headline change in non-farm payrolls to be more favorable to the upside, to outperform market expectations, that being of 146 6,000 jobs created in the headline figure today, or is it going to be more to the downside? And this is how we then start to calculate this, this thing that's called a whisper number. Now, whisper number is not a mathematical formula to calculate it, it's just a rough kind of guesstimate of— in this case, if we look at it, um, ISM and manufacturing and non-manufacturing both big negatives. The employment index in the service area, and if you remember the composition of the US economy, you know, very much consumption-driven, so US consumer is key. And that came in at 50.4, uh, that was against— and that's a decrease against a previous of 53.1. Uh, as far as that data is concerned, around a 3-point drop is large as far as that component is concerned. The manufacturing employment subcomponent, uh, in ISM disappointed for a second month in a row. It printed at 46.3, so way into that contraction kind of territory. The Conference Board's Consumer Confidence Index negative. ADP a miss. Job, job openings a miss. So all of these things have— although there's been some slight, um, positive points maybe Challenger job cuts or the University of Michigan Consumer Sentiment Index, on the balance they've been negative. And hence what we've seen so far, uh, this week, that meaningful shift in the fixed income market in regard to what the Fed are going to do, the equity reversal yesterday, uh, and so on. And so actually the whisper number today, as I said, is, is tracking at about 20K below what the Street consensus Consensus. This is a very important thing then to take on board when you are interpreting the numbers as they come out today, because the consensus now no longer matters. Because if we hit the consensus of 1.46 and we're talking about the headline alone, that actually is a strong number because the market is positioned for 1.23, 1.25 type area, if that makes sense. I'll go over all of this again. I'll I'll do a more in-depth thorough preview encompassing the charts and what assets to trade and what levels to target accordingly when we get closer to the release at 1:30. But hopefully that's a bit of an overview of the, the kind of procedure, if you like. And I'm just going to put this link into the chat room now on Trading Live so you can see it. All right, let's move on. Um, another story probably helping the technology sector out a little bit, and worth keeping an eye on Apple later today. You'll remember the iPhone X for Apple was a huge disappointment, and if anything, they had to cut back the supply because of such tepid demand for that, that particular model. Well, the iPhone 11 has been a resounding success, at least so far. Apple has told suppliers, according to Japanese press overnight, to increase production of their latest iPhone 11 product line by as much as 10% to meet stronger than expected demand for their new handset. This, of course, is kind of the, the innovation here is very much centered around the camera feature. It does calculate then a 10% increase into around 7 to 8 million more handsets than they were anticipating. Also, I think one of the parts of the reasons that led to the, the weak response to the X was about the new contract changes, given the high price point of that particular model, meaning that people weren't due for an upgrade. Whereas I guess now that is slightly different. So maybe some pent-up demand as well in that respect. But worth keeping an eye on Apple later. When Apple has good news, this does reverberate across a lot of the, the different component supply high makers as well. So if you were a single stock watcher, worth bearing that in mind. Moving over to Brexit, a couple of things here to point out. The one thing firstly is that the pound isn't moving, but there's obviously plenty to chew over in terms of the current state of play with Brexit. So I'm going to do my best to summarize a couple of points that I picked out, out of various sources this morning. So this is the headline: Boris Johnson gets one week to improve his Brexit offer or face a delay. Now, why are they talking about this one week or delay? Well, you remember there was of course the so-called Benn Bill passed by lawmakers in British Parliament in mid-September that obliges the Prime Minister that if he doesn't have a deal by, I think it's the 19th, then he has to go to the EU to ask for an extension of Article 50. Now, this is why Boris has been very vocal about this kind of more like 11th of October deadline. He basically needs to get something done in the next 2 weeks, uh, or otherwise he has to go, uh, cap in hand to the EU for that extension. That's according to the law that got passed before. However, some lawmakers are concerned that the government may simply refuse to send that letter. You know, this is Brexit after all, and since when has this ever followed the plan? It's, it's always been subject to last-minute changes. Now, how would this work? Well, the PM could decide to resign rather than ask for a delay, thereby requiring a swift formation of a caretaker government to come on board to ask for that extension of Article 50. Remember If Boris was to ask for an extension of Article 50, that would be a horrendous outcome for him given he's pinned his flag on do or die, we must deliver Brexit. If he then goes cap in hand to ask for this extension, um, obliging the Ben Bill, then that means he's going to lose massive amount of political support, likely to then the Brexit Party. And he cannot allow that to happen. So we're in this kind of weird zone of brinksmanship going on at the moment. So a couple of other things then to be aware of. If Article 50 extension is perceived by many voters to have been forced through though by opposition lawmakers or by judges in say the Supreme Court, as we've seen with that Scottish ruling, recently, then actually that could play into the hands of the Conservative Party because then it, it completely supports that idea of the people versus Parliament. Let's get Brexit done. All of that stuff that Boris Johnson was drumming into the crowd at the Conservative Party conference at the end of the week. So I definitely think it's the latter strategy, but obviously there's a massive tail risk that if something doesn't give and no one kind of makes a concession at the last minute, then there is still this possibility that we could crash out with a no-deal, non-transitional, disorderly Brexit. And obviously that would have huge immediate ramifications on the way of which asset classes would need to react. Even with that being said, I am gonna have a stern conversation conversation with Sam later this morning. And if we did have that case, and if the pound did see this quite aggressive reaction, and let's say over a course of a day or days we did fall, let's say, 15 points, for example, so significant under those scenarios, I would be talking to Sam about taking— let's, let's put some serious money into long-term, a long position. I definitely think that— I still think at some point, um, this isn't for the intraday market. I think for, for a long-term trade, I think the pound is massively undervalued if you X out Brexit. And I still think Brexit no deal is a very limited scenario, but even if that did happen I still think that the market inherently will overreact to that initial knee-jerk reaction, uh, and I would definitely want to get long at that point if we did get down to what that kind of 105 type area, which a lot of people have, have kind of banded about, is what we could see if we had a disorderly no-deal Brexit. Anyhow, I digress. Looking— going back to a couple of final points Boris Johnson is believed to be holding meetings with European officials over the weekend. What have European officials currently said is the current status quo for their interpretation of Boris's and the government's plan for Brexit, which he unveiled about 2 days ago? Well, Donald Tusk spoke with the Irish Prime Minister, and they've said that they're both unconvinced Junker has said it's problematic and had grave concerns. Now, I saw an absolutely excellent short 10-minute video explaining really concisely what Boris's latest plan is, because it is quite confusing because there's a difference between the customs border and then this Irish Sea border. And to make sense of that, I will put in the the chat room and on the video comment section on YouTube a link, and I highly suggest you watch that over the weekend to make a bit more sense of the current Conservative plan. So definitely there's going to be more comments over the weekend, I'm sure. Is there going to be anything meaningful in the form of a breakthrough? I don't think so. I think this now goes down right to the limit of, as I said, in the next 2 weeks or so, right down then just before the EU summit to discuss specifically Brexit, which happens on the 17th and 18th. He then has that deadline, of course, from that Benn Bill on the 19th. So a lot has got to happen between now and then. But I would say, given we're on the 4th and that's all kicking off on the 17th, I wouldn't see anything meaningful happen until around between the 10th and the 15th, to give you some idea. Okay, I'm not even going to look at the calendar. I'm going to hand you straight to Sam, because you know what the main drill is for today. It's non-farm payrolls. So let's get Sam on and see what he has to say. Thanks very much, guys. If I don't speak to you before, have a great weekend.

Hi guys, good morning. I hope, uh, we're all doing, doing well. Just going to start off with the, the S&P. You can see almost coming back into that zone that we were talking about a few days ago, still marks up here. And I was just having a look at the charts from, from the week, well, from the, the pictures or the charts of the screenshots of the charts you put into the weekly strategy. And actually, the charts have been so technical this week, it's, it's incredible really. See, that test, the third test of that trend line was, was good in S&P the false breakout, got down towards 2850, found support almost hitting the level from 28th of August. And obviously we're now back above. Interesting to see where we close the week. See, trading pretty much bang on 2900 at the moment. You can see here there's more intraday, and that itself is a big level. Can we get back up to 2937? A close above there would be, would be massive, and obviously a big push from where we're trading, uh, or where we were trading yesterday after that data release. Um, so yeah, we're keeping a close watch on, on that come the close of the day. Also, just around, uh, today, uh, on the pivot, 2892 looks pretty key. And I would say S1 as well, just because obviously we had that spike through that trend line. There was also the low which was the longer-term trend line that we had from Wednesday. Good price action again on a bit of support point previously. So those, uh, two levels below where we're trading, uh, would certainly be somewhere I'd have marked up. Uh, the high of the day, you can see the importance of that, was also a previous low from Wednesday as well. So these markets, as I said, have been acting very technically. And just having a look as well, we had the, the Euro dollar, just bringing that into picture. Give me one second, put this on a longer term chart. You can see, let's get rid of the pivots, just the importance of previous highs and lows in this market. You just couldn't get the break above yesterday, uh, the previous high, a previous low I should say, of the, the 24th. That acted as a really good level, uh, of resistance. The pound as well we're stuck within this range. Similar level, you can just see the importance of that. Again, uh, similar days to those euro lows, uh, and now obviously we're, uh, well, we've come down a fair bit already from the 80 ticks or so. And again, the failure to make the low below the 5th of September. So the pound stuck very much within this range here, uh, certainly against the euro and the significance of this level here. 124.46 to the upside. A break above there, later weaker US numbers or positive Brexit comments, and of course a decent push higher could well be on the cards. And to the downside, you've got to imagine it could open up with a close below 122.60, and, and then yeah, 122 and below comes in quite quick. More intraday on the pound, of course. Non-Farm going to be the dollar side of the driver. Uh, we, we had a decent break above, uh, this, this area yesterday. Didn't really, uh, confirm it though, which is, you know, slightly worrying for the bulls. And obviously we hit the top end of that range as we mentioned. However, you have got some previous, uh, highs from yesterday and Wednesday evening, uh, that have acted as support so far, 123.50. The area, I would, I would still have marks up there. Also from those lows, uh, the trend line here, is that going to be respected potentially later on? Something I would have on to almost predict where that third test could, could well be, uh, as well. You can see this trend line here, uh, offering a bit of support around 1.2350. So the pound and euro, some decent levels in the mix. Another chart that has been well, uh, respected Technically, of course, is the, uh, oil chart. And just move these out. And we were looking beginning of the week at the, uh, the trend line on the 240— not 24-minute, 240-minute chart from those August lows. Let me just bring this into a clearer picture. Once that broke, we, we got a retest, not quite to the tick but to the zone, and Let me just bring that in one sec. There we go. And since then it has, has drifted lower in waves, come back and retest, and some good opportunities, uh, once we got down to 51. Didn't quite make the 50/50, uh, a decent recovery yesterday, uh, as, uh, it turned out bad news actually is good news again and not the other way around or whatever. Looking at this more intraday for, for oil, when, um, we come into the latter part of the day, it could be that we do have a bad number and the whole global slowdown fears take over again and oil comes under a bit more pressure. Pivot is key, I would say, intraday, or really just a bit above that $52.17 low of Wednesday. Decent reaction yesterday all through that, and obviously the $52 handle and pivot just just below. The high of the day, uh, is important, and I would have this more as a zone now. Uh, the low from Tuesday, the, the high from Wednesday evening, Thursday's highs as well, and today, and $53, a really key level, uh, that if we were to get back above there and close, uh, that would be a pretty significant, uh, attempt to, uh, trying a further retracement here for, for the bulls. Is there any trend lines having a quick look to, to see if there's anything of interest just over the last few days. And you can see this one here from starting on the 30th to the 2nd, and then it's coming into that $53 handle as well, and those highs we just mentioned. So some key points for, for oil. The bulls will want it above $53 at the close of play, and I think if we go anywhere below $52.17 and pivot today, then, uh, 50/50 will be be, uh, the target along with yesterday's low relatively quickly. Quick look over, uh, the DAX is coming under a touch of pressure, uh, 36 minutes into the open now. And that pivot, the first test held well. If we get, uh, below there, then it could, you know, I would say it would actually get quite choppy. I mean, just looking at yesterday, uh, around that price point, you can just see quite undecided. So for the DAX, I mean, I like the idea of of short, um, a bit higher up. But again, this would be a case of probably waiting to, to sort of see a false break higher, I think, for, for equity, something like this, before actually taking that trade on. Any questions, as usual, please, uh, do let us know. And like Ant mentioned, if we don't speak to you, hope you'll have a great weekend there as well.