US Non-Farm Payrolls Preview

Okay, very good morning to everyone. Hope you are well. It is 1st of November and Friday, of course, meaning that it is non-farm payrolls later on this afternoon. So we will be covering that live on YouTube later. I'm going to go into a bit of an overview in this short session about what our expectations are, but we'll go into more detail later this afternoon ahead of that number. Remember the time difference, so half past 12 for payrolls. US clocks don't change until this weekend, then we revert back to normal timings. Overall, looking at the charts this morning then, very much a reflection of what is quite typical on the morning of NFP, meaning that everyone's in kind of a wait-and-see mode. And certainly since the last time probably I spoke to you guys on the night of the FOMC. Just given, uh, in conclusion, what the Fed were saying, which was an idea basically hinting towards that what they've done is enough, however they will continue to just monitor incoming data, does mean that economic data does play quite a significant role now in how markets will be building up their expectation, uh, of what the Fed are going to do later this year. Obviously, no meeting from the Fed in the month of November. The next meeting not until December. And on that notion, let's just actually have a quick look at the federal funds rate futures and what the implied probabilities are for December. So at the moment, the market is still heavily priced in that it's 3 rate cuts in this mid-cycle adjustment, and that's it for for the time being unless things were to deteriorate further. So it's a 78.6% probability of rates remain on hold and where we are at 1.5% to 1.75%, 21.4% for a cut at the moment. So even if payrolls came out particularly bad, um, you could see then that section see a slight uptick. But the way that general market rate expectations fluctuate, this 21% doesn't go to 78% on the back of one data point, Remember, it's a lot more, um, central bankers will look at data as a whole in terms of the reflection of different parts of an economy, not putting great weight on just one economic indicator, because that in itself then would create almost instability in the market where you'd see wild fluctuations in just a singular data point. Um, we're going to talk about payrolls in a second because there's a very important thing about payrolls which I think renders it almost redundant. and it's going to create large fluctuation, but ultimately I think it will be largely discounted if it is a weak number, which is likely to be the case, and I'll explain that more in a moment. So overall on the, the charts, it's, it's pretty quiet as you would anticipate. The dollar is a touch weaker, the Dixie's down about 0.1, so both major pairs relatively supported. Uh, quite interested to see, obviously yesterday I believe we're still— we're awaiting royal assent for the election date, but that's all formalities now for that 12th of December election. So takes a little bit of the sting out of, I'd say, some of the volatility that we were seeing ahead of some of these legislative deadlines that were influencing the pound. Now it goes down to the campaigning side of things. So pretty quiet there. As I say, holding patterns really for other assets. So let's just go straight into the news. No Sam today, so I'm going to keep this a more fundamental rundown. I'll leave the technicals to yourselves, and then as I said, we'll talk payrolls more later. Starting off overnight, we had the Chinese Caixin Manufacturing PMI. Now check out that graph. Everyone talks about China, the economic slowdown, and what we've seen here is an unexpected rise that exceeded market expectations. We were looking for a Well, the market was anticipating reading of 51. It came in at 51.7. The latest reading pointed to the strongest pace of expansion in the manufacturing sector since February 2017. Output grew the most since December 2016. Total new orders increased at the fastest rate in over 6 years, boosted by a rebound in exports. So remember, you have these kind of, uh, the state PMI number and then this vacation PMI So difference between big and in small, medium-sized companies as well. So this pretty healthy actually. And if you actually look at it again on the longer time frame, that the severity of the dip, of course, that we were seeing towards the back end of this time last year when we had that stock market rout, couldn't be any really different at this point in time. We're pushing back up to the highest levels here in the headline reading since 2016. So bit of a welcome relief because The other thing, of course, that's happening at the moment, and it— this is absolutely no surprise in my mind at all— China said now that they're in doubt about the long-term trade deal possible with Trump. Remember this graphic? It's a graphic I've shared many times before. A little bit of history repeating itself once again, of course, because we were here Well, we've got the red sign here, dropped to where we, we have been recently. Remember, you've had the Fed cutting rates and you've had a partial trade deal secured, temporarily holding back on any new implementation of tariffs on China by the US. What happened? Record highs in the US stock market this week. What happened now? Well, we move on in the trade war cycle. Lo and behold, no progress is made. As much as Trump was tweeting yesterday about the deal is almost 60% done, I think is what he was saying in one of his tweets, the idea here is that China still aren't budging on the more contentious issues about intellectual property theft, which is the key one really that they've not addressed as yet. So the agricultural purchases are ongoing. Perhaps that appeases and keeps the— keeps it calm for the moment. But ultimately, there are still tariffs looming at the end of the year. Someone yesterday was asking me, what's my outlook for year-end? Well, if you think about it, you've got a general election happening in mid-December, and you've got the next initiation round of tariffs coming from US on China in December. So for me, it's not so much about November, it's about December when things really start to kick off. And you've obviously got the Fed decision as well. So here we go back in, no progress made. Lo and behold, I would absolutely anticipate Trump now to be talking out, increasing the rhetoric of aggression towards China. I was collecting data when Donald Trump first became president, and he was tweeting with an average frequency of 6 tweets per day. Anyone know how many tweets he did yesterday? What do you reckon? He did 36 tweets yesterday. He was averaging 6 when he became president. So I don't think that's surprising. Obviously he's got an election campaign to manage to embed or secure his second term at the end of next year, and that begins now. And of course, what is he talking about at the moment? Well, it's the great witch hunt, of course, which dominated the Twittersphere yesterday. So what happened yesterday? The House voted 232 to 196 to begin public phase of inquiry in regards to the impeachment of Donald Trump. Now, I did get a message of one of our former traders yesterday, and he was asking, 'And what would happen if Trump gets impeached?' Now, my first response to that question is he is not going to get impeached. What I mean by this is Sure, the House might— he might get impeached in terms of the procedural process of impeachment will begin, but he is not— it's not going to get ratified. I can tell you that now, and I will put my neck on the line and make that call definitively. Trump then becomes just the fourth president, of course, to be subject to a formal impeachment process. The other two were Bill Clinton and Andrew Johnson, both similarly impeached by the House but were not convicted in the Senate. So again, never got impeached formally. And then Richard Nixon, we know the deal there, he just basically hopped off before, before it was pretty evident he was going to go down, so he just resigned. So the idea here then is that a lot of people making a lot of headline noise about the fact that's the first president to go through impeachment and seek reelection. A couple things here that have been happening. One, Trump has been said to be having lots of face-to-face meetings with more than 60 House members, and no House Republicans voted in favor of the impeachment resolution because of course he needs to keep his own people on side, and that will block it when it comes to the formalities of passing through the different chambers of Congress. So it means that he can't really get impeached without them walking across the floor and joining the other political party. For me, how I interpret this is from a political point of view, I think Trump being impeached absolutely plays into his hands for getting reelected next year. It galvanizes his base and it gives him plenty of ammunition to continue just banging the drum he always does that everyone's out to get him. And it's been, I think, such a strong message to his base. From a market point of view, if he did get impeached— now this isn't like he gets impeached, the market collapses. If it— we've got to go through, like what we've seen with Brexit, lots of political barriers before we get to that point. So it wouldn't be a one-and-done dramatic headline move in the market. It would have to be to the point where there'd be this kind of main event being a Senate vote, and there'd need to be lots of rumors coming out. Markets would have already been pre-positioning in what the rumor mill would have been indicating at that point. If it was looking like he was going to get impeached completely formally and be the first really ever, or since Nixon, let's say, before he were to leave, then I would anticipate equity markets to get absolutely slammed in the initial move. Because a lot of this is propped up on this idea about what Trump has been able to do in order to cultivate this economic stimulus. However, in the medium term, perhaps then, you know, what's the longevity of the US's protectionist stance? Perhaps it's diminished somewhat, and then does that then create almost relief for the likes of Eurozone, for China, for global trade? And then do actually we start to stabilize perhaps. But the initial move, I'd say, would be a significant correction in some of the market moves we've had of late over the last 3 years. Anyway, we'll move on from that. As I said, I do not think this is a risk worth contemplating at this point, despite the, the amount of news coverage it's likely to get. Other things we had last night: Apple, um, generally quite positive, uh, as the headline would suggest. No blemishes, positive demand for their iPhone 11. and in particular increased revenues coming from the services and wearables divisions. And so they continue to quest to diversify away from such dependency on the iPhone, which of course is seen as a positive. So their shares were up as much as 2.2%, hitting record territory. Valuation's now $1.1 trillion, knocking Microsoft off the top. And Facebook gains show user growth still possible in the US. Shares were up after market, albeit marginally. Quarterly sales reached a record. This, of course, coming amid ongoing concerns about political ads policy and privacy. You'll remember this week Twitter now have stopped any paid advertising for political messaging, so they're the first to do that. But I think given the, I guess, environment that we live in socially at the moment, I wouldn't be surprised if other companies look to kind of follow a similar suit, even though it's obviously a massive revenue generator as they try to manage the political fallout of these types of issues. But Facebook, Apple, generally positive. So it's a little bit of a balancing act at the moment. You've got, um, the trade war seemingly coming a little bit undone at the moment. Perhaps then people a little bit unsure about what to take from the Fed. Is this the end of any of the immediate policy support in terms of the mid-cycle adjustment? These would all be negatives. However, Chinese manufacturing PMI picking up overnight, and you've got solid generally on balance corporate earnings. Uh, hasn't been the case for every single company, but when I was looking earlier this week, 80% of all companies reporting in the S&P have exceeded their earnings per share estimates. And some of these tech giants, these FAANG names generally— Facebook, Apple last night certainly, uh, have been pretty decent. All right. Before I move on to payrolls, quickly two other things to be aware of. Uh, oil prices haven't moved too much this morning, but I did clock a headline earlier about half 7 AM. Yemen's Houthis— so the Houthi militants— have reportedly downed a US-made drone near the border with Saudi. Now, oil's not really responded. Um, the proxy war with Iran via the Houthi militants in Yemen is Nothing new, just wanted to make you aware of it in case, uh, you get caught with a headline and you're unsure what the situation is. I would say, although that sounds like quite a dramatic headline, a US drone being shot down in, uh, suspect circumstances, I would say it's not the first time of that kind of tension happening in that particular region. So I wouldn't be too shocked by it. Final thing I just wanted to say before I jumped into payrolls was about Brexit. Obviously, I've not delivered a briefing in a couple of days, and I know Sam's done a good job covering everything. What I intend to do is sometime next week, I'll give you my call for the election. So I'll have a think about it over the weekend before I commit for my next call on what I think, who's going to win, by how much, and most importantly, how the market's going to react between now and then, and then after the event. So I'll do that next week. But a couple of things, food for thought here, that I thought was quite interesting having talked to some people about this yesterday. And one is this: this general election is completely different to any general election in recent times. What I mean by this is Jeremy Corbyn talking about nationalisation, free university school fees, Boris Johnson talking about more funding for the NHS, police on the street. All of that is absolutely irrelevant. This is not a normal general election. This is 100% about Brexit and what people feel about Brexit, polarised by maybe the Brexit Party on one side to the Liberal Democrats on the far side, either do the most aggressive delivering of Brexit to revoking it is kind of the state of play that we've come to at the moment, polarizing this issue completely on a singular narrative. So this graphic here was from the BBC. This was a recent opinion poll not looking at who's going to win the election, but by what is the key subject here. And you can see since 2016, even though things like crime, of course, with the uptick in knife crime, particularly in central London, I mean, that has seen an uptick, but the undeniable balance of power here is on Brexit. And this in itself brings up some quite interesting things to be aware of. For one, I was reading quite an interesting thing about the area of Wimbledon, for example. Now Wimbledon is a very affluent area of London, and no surprise then that it voted heavily to remain. And yet it's always been a Conservative seat. Now, the Liberal Democrats, quite interestingly, were way behind the last time there was political votes within that particular constituency. However, the Liberal Democrats have been vocal saying they quite fancy their chances of winning Wimbledon. Remember, even though Wimbledon will be an area that has always voted Conservatives, they also heavily voted to remain. And so can they, given that the government wants to deliver and needs to appease also Farage's Brexit Party by maintaining quite an aggressive stance on delivering Brexit as to not disenfranchise those people that want the delivery of that, and appeasing Farage in not running in their seats. Talking that game talks against them, probably, these people, and strengthens the Lib Dem argument. So yeah, it's going to be really interesting on these folds. The other thing as well is, another question I had was, are political opinion polls going to be market-moving events for the pound? I would say no, for two reasons. One is I don't really see political opinion polls changing or deviating too much between now and the next couple of weeks, not unless there is an absolute scandal that rocks the boat. Now, stranger things have happened, of course. If Boris Johnson comes out and is found to be, I don't know, part of some kind of pedophile ring or has done something of that nature, fine, that could have an obviously monumental impact. Think about what happened before the referendum. There was the murder of a parliamentary MP just days before the referendum, which did have a meaningful impact on the opinion polls. So these types of things, yes, but these are unusual circumstances which are low probability. So in all respects, I continue to foresee the Conservatives will hold on to this 10 to 15% kind of lead over their main opposition party, Labour, for the moment. So I don't really think opinion polls will be too market-moving, not now, perhaps closer towards the event in itself, depending on how things pan out over the campaign period. The other thing that's particularly key here is the accuracy of polls. Now, if you remember, in 2017, Theresa May had a 22.5 percentage point lead in the average poll of polls when she called the snap election, and she came out with a worse majority than she went into the polls with. So the only pollster that got it right in 2017 was YouGov, which at the time used an experimental a multi-level regression and post-stratification model. Basically what this means is that they were using a larger data sample size. Now the reason what makes polls quite inaccurate is they usually, typically, they only canvass about 1,000 people. What YouGov did in that previous one, which did actually call the fact that May was going to come out worse in a hung parliament, they canvassed 50,000 people. So Yeah, perhaps some tweaks in methodology have made things a bit more accurate, but again, I would take them largely with a pinch of salt in that respect. But again, I will collate my thoughts into a more constructed slide-by-slide argument to make things crystal clear next week. Let's talk payrolls then. I'm going to go over this a lot more detail later, but this is the, the kind of state of play. Remember, key to understanding how payrolls might come out is understanding the employment indicators that have come out from the US as the prelude to this figure. Now here, what have we got? Well, there is a hierarchy as well to these numbers. I mean, there's no point looking at jobless claims, continuing claims, initial, continuing, and thinking that's the definitive factor just because both of those have been neutral. It's going to be a neutral payrolls. Well, no, I would place greatest weighting on the likes of ADP that was pretty much in line. It wasn't really too much of a shock. However, the ISM manufacturing, non-manufacturing employment constituents were both weaker. The employment index and the very important service sector came in at 50.4 in September, a much smaller figure than the 50 point or 53.1 level seen in the prior month. And for manufacturing The employment subcomponent disappointed for a second month in a row, printing a modest 46.3. So still significantly and heavily in contraction. So they're the two I'd place greatest weighting on. So there is some expectation of a downside number today. If you actually look at the headline non-farm payrolls, just given the data that has been coming out, it has been, um, refined, and analysts' expectations now is for a 89,000 job creation print. So continuation what has been month to month to month to decreasing levels of jobs created in the US, and hence the reasoning behind why the Fed felt appropriate to cut rates again earlier this week. Now the range here, check out the range, is 10,000 at the low. So the most pessimistic bank on the street is looking for 10K The most positive, 155K. Now, the reason why this number is so low comparative to previous and there's such lowball estimates on the street is a very important factor. This month's data is likely to take into account the impact of nearly 50,000 striking General Motors workers, as well as related effects from idling at the company's suppliers and contractors who work alongside that firm. What it means then is that this automaker, um, General Motors, has had its longest nationwide walkout since the mid-1970s, which would have occurred right slap bang in the middle of the survey period for which the BLS conduct this month's non-farm payrolls. So it's right through the mid-month reference period. So that being said, if we got a 10,000 job number I would expect that initial algo kind of hit— hitting the figure, but I would say that any downside number will quickly get downplayed and accounted or put accountable to the GM strike. So the manufacturing data subcomponent figure will be quite key. And actually, I think don't get caught out and spooked by a particularly low change in non-farm payroll headline. Just like when— if you look on the data set of what non-farm payrolls looks like in the long term on Trading Economics, for example, every time you have an anomaly, it's normally down to explainable reason, usually the weather or a government shutdown. This time it's down to a phenomenally large, uh, strike at an auto manufacturer. So I actually think that this non-farm payrolls, if I was a central banker I'd be thinking it's not really that clean a data point, so it's not going to change the needle too much upon what is it that really we're going to do. And so by default, I don't think it's going to have too much long-lasting impact on the market for the rest of today. That doesn't mean it's going to be very volatile on the initial release. If anything, it's going to be more volatile, but ultimately I think it's not going to reshape market expectations about the Fed too much. So it's going to be very volatile on the release, maybe not so to carry through for the rest of the day. I'd be looking out more so then for anything further from Trump. If he ramps up aggression on China and they retaliate in their commentary, could we see a bit of a pullback in equities to reprice in the breakdown of the partial trade deal? That would be more interesting, I feel. So yeah, I mean, that's pretty much it for the day. I mean, after payrolls you do get ISM Manufacturing and things like that. I'm sure that needs to be watched because all data obviously is being factored in at this point, but it does come after the main event, um, so it might take a bit of a sting out of the tail. Speakers-wise, um, this I think will be particularly interesting. This is kind of the 101 of tactical placement of Federal Reserve speeches after an FOMC meeting. Don't forget, there's still an additional day blackout period where they can't speak. Now you've got key data plus payrolls and ISM plus the weakness in Chicago PMI yesterday. Actually, I'm probably more interested to hear what these key FOMC people have got to say. Uh, Williams is a voter, Quarles is a voter, Clarida is a voter, and so a lot of these guys I think will give more definitive stances than perhaps what we're going to see in what's going to be a fairly noisy data set because of the anomaly of the strike being factored in from GM. All right, not going to talk any more than that. I'm going to leave you guys to it. Um, Will will be here as well through the morning and payroll, so great to have him alongside us. I'm sure he'll be happy to help as well. So I'll come back on, we'll go for a full payroll preview, we'll kick that off. Um, at 12 o'clock midday, and the numbers will come out at 12:30. So hopefully you will join us then. Thanks very much, guys, and good luck today.