US Non-Farm Payrolls Preview

Okay, very good morning. It is Friday the 2nd of July. I hope you're doing well. And just as a reminder, like I do on every Friday, to check out the Market Watch podcast where I'll be chatting with our Head of Trading Piers Cowan hopefully later today. We've both got a pretty busy day ahead of us with non-farm payrolls, of course, but we'll do our best to try and get an episode out for the weekend. If we don't, of course I'll let you guys know. But otherwise, look, let's just get straight into what's going to be happening in the markets. And of course then the focus is going to be on US non-farm payrolls. So as you will be accustomed to if you've been looking at markets for long enough, then the morning before the madness is always quite, quite calm. And across the different asset classes, things are relatively flat. But before I go into that in more detail, We closed at record highs once again in the S&P 500. So gains were 0.5% for the S&P, about 0.4% for the Dow, and pretty flat actually for the Nasdaq after it had seen quite a decent amount of outperformance throughout the week. The energy sector was helping lift things. Obviously, we saw oil prices move higher yesterday. We did momentarily in the futures market trade up to a high of $76.22. We've pared a little bit from that point, just holding a $75 handle at the moment. And of course, that came after the number that was kind of being banded around by the JMMC was more about recommendations of 400,000 barrels per day, which was a lowball number compared to where expectations from the market resided. Otherwise, though, let's go and have a look at what happened in Asia. So despite that more firmer close that we had on Wall Street, Chinese stocks are actually on pace to post their biggest one-day drop in more than 3 months. In fact, what is the reason behind that? Well, there's not really one singular catalyst. There's a couple of things that people are looking at. First of the kind of slowing economic growth. We've had some economic data more recently, still pretty solid but moderating. And then we've also got this idea of tighter credit conditions. The central bank just looking to tame any kind of asset price bubbles ongoing. The declines in China and Hong Kong were pretty broad-based. Property stocks faltered. The Hang Seng Tech Index, which tracks some of China's biggest technology giants, was actually down over 3%, so it was underperforming in those growth names. Otherwise, the other thing that is obviously ongoing and definitely is a little bit more at the forefront of investors' attentions, given that we had the party in China's centenary yesterday, is the fact that there's also been further criticism from the US State Department regarding China's nuclear buildup, as well as its actions concerning the Uyghur Muslims and Tibet and Hong Kong. So a lot of friction at the moment on a geopolitical front. Again, it's kind of ongoing, but perhaps as well just a few people looking at that given that situation politically that we had with that event in Beijing yesterday. So yeah, China a little weak overnight. I don't see that as a read across though into what's going to impact the market open. From a sentiment perspective this morning, I'd say we're pretty neutral overall. Most of the asset classes are pretty flat. Oil's just edging a little lower for the moment, but that doesn't come as too much of a surprise with a bit of short-term profit taking off that initial run-up high that we had as we await the actual official OPEC+ meeting, which is going to happen this afternoon at 3 30 London time. In the FX markets, what was quite interesting is yesterday we were looking on the daily charts, a couple of key levels for cable and the euro, predominantly based on key areas of technical support amid then ongoing appreciation of the dollar. And I'm quite interested to look at this morning, the calendar for the UK and European morning is really quiet and there's just nothing going on. So will we get a little bit of prepositioning? People generally still, as we've been in this place for the last two NFP readings, kind of erring on the side of perhaps a decent, a strong upside number if that does materialize. And so the Dixie actually, as Europe has come in, has just perked up a little bit and is trading back up to the range high that we had yesterday and in the overnight Asia-Pac session. So The euro at the moment is below those levels, and just intraday it's just had a brief flirt with that low that was seen this time yesterday morning. So I'm quite interested to keep an eye on those currency pairs, not only over the release but also going into the release, if we start to see a bit of further dollar bid going in on anticipation of a firmer number. Cable, you can see with that dollar strength as European players have come in, has just moved a little bit, a little bit lower again. You've got the lows seen late in the US session. And with cable, definitely much more confirmation on the break technically through that area of 138 that we were looking at yesterday. So definitely a firm NFP today and further injection of pace in the dollar on the upside would then target much deeper moves down to 137, that double bottom that we had for the March-April move of this year. Um, let's get into some of the stories though and talk about a few different things. So going to kick it off with OPEC. So the Joint Ministerial Monitoring Committee. So again, don't, don't get confused. It's easy to do that because you have the JMMC, which was delayed, and it was those guys that were meeting yesterday. They were trying to put forward their recommendations then for the actual formal OPEC+ meeting, which is due to happen today, which was supposed to be yesterday, that got bumped. Because of all of those subsequent delays that have happened. So hopefully that makes sense. But we're still yet to really get this deal ratified, so we could still see a fairly large degree of volatility for oil prices as we go throughout the day. And again, not so much triggered by NFP. And, you know, if you think about the implication NFP has for oil, it's very much several dominoes down, down the road. Although payrolls is quite integral to what the Fed assessment of the economy has looked like, and subsequently the timing on their tightening, whether tapering and rate rises. Subsequently, that will reshape then forward thinking about the trajectory of the economy, and that will impact then people's outlook for demand, for example, for oil. But this is, you know, several things have got to happen before then. So with oil, it's not really the product to trade for over the release of NFP. And on a day like today, definitely the focus in that particular market will be heavily on the OPEC situation still. And needless to say that it wouldn't be a surprise at all to hear a completely different contradictory kind of outcome to what we've heard yesterday. So at the moment, the market's fairly buoyant, and we, we saw a decent rally yesterday going from really around a 74 to a 76 handle. We've kind of midpoint now at 75, and so there is still scope for kind of movement either way. Confirmation on ratification of the, the announcements from yesterday, which were a recommendation the group should add 400,000 barrels per day a month from August to December. Kind of two ways to look at this. You're looking at the depth of the cut and the duration of which it's implemented, and that will dictate then the overall type of speed and pace of what they're, they're trying to achieve. And so Yeah, still bit to play for. Um, the panel, the JMMC, yesterday suggested the duration of cartel's production cuts agreement should be extended to December of 2022. The current deal is set to expire in April. So they're feeding back a little bit more into the market, perhaps a little bit less than anticipated, but they want to roll over the production cuts for a little bit longer. So it's kind of a give and take kind of strategy in that sense. So That's the OPEC side of things. Otherwise, elsewhere, quite interesting, we're talking about vaccines and Moderna and Pfizer and so on and their efficacy rates against the Delta variant. J&J was one that's been looked at and they've come out with a company announcement overnight where they've said they've had positive data on its single-shot vaccine demonstrating strong results against the Delta variant and providing long-lasting durability of response. And the J&J one of course was a bit in focus for a few different reasons. For one, it's a single-shot method, if you like, and so the general efficacy rate is lower than a two-shot regime, is what you'd see with a lot of the other vaccines. And when people were asking the question, is that enough protection against the Delta variant, of which the company studies, and they've come out and said it is. J&J's faced a few other manufacturing kind of bottlenecks. They've also had problems with blood clots as well, in a similar fashion to AstraZeneca. So it's not been the smoothest sailing for the company, but certainly this would be somewhat warmly received generally by the medical community, and the fact that it's proved to be up to the mark in that sense against the mutations and the more transmissible Delta variant. The company itself, J&J, is to report efficacy data from a late-stage trial that's happening at the moment of a two-shot regime, and that information is set to come out at the end of next month, the end of August. So something to be aware of, these kind of top-ups to then further lift the protection levels, um, could be quite interesting. The other thing on the, the coattails of that, of course, is lockdown strategies, and the UK Prime Minister Boris Johnson has said there could be, quote, extra precautions could still be required even after the July 19th date, which at this point in time looks very much like that will go ahead as planned for the final unlocking of the UK economy. And that comes as latest figures show just over 26,000 new cases were reported midweek, the most since the end of January. But as we know, thankfully, hospitalizations and deaths still remain relatively low. Looking then at the day ahead, as I said, there is, as you can see here from a data perspective, absolutely nothing coming out this morning. Producer prices in the eurozone, I wouldn't really see as a market-moving data release, irrespective of the fact that perhaps half an eye, just given the inflation focus of the market, and we are expecting year-on-year to perk up to 6.5% from 7.6%, but all eyes will be on, of course, non-farm payrolls There's a couple of things to cover here, um, and that is that non-farm payrolls is quite key in the context of where we're at at the moment in terms of what the markets are looking for, um, in regards to signs of when the Fed might start to then change in terms of what Powell and the more centrist members of the FOMC are thinking. We've seen over the last week or so a real ramp-up in the hawks becoming more vocal about their idea of accelerating the kind of timelines with tapering, with rate rises and so forth. And of course, this is all triggered on the back of that 2-rate hike surprise for the dot plots in 2023. But so far, Powell has kind of just toed the line. He's continued to keep a fairly firm and straightforward message, which is one of a much more dovish stance of being cautious and gradual. And the jobs market has really been an area that's allowed him to keep that stance. So why this particular payrolls report is quite important is, well, if this headline figure and overall report is a knockout, i.e., really strong, it just eliminates one of the main core reasons of what's making him be more dovish. And if you lose that, the markets might continue then to continue to price in a more accelerated tightening, uh, kind of future going forward. And that could mean then that you could see today a decent pop in yields, the dollar. We've already looked at those currency pairs which are susceptible to dollar strength to see some decent runs to the downside from a technical perspective. Um, gold as well would like to get bumped lower on the back of that, um, just to reverse some of the appreciation we've had over the last 48 hours or so. And so, yeah, there's quite a lot of emphasis on this. On the flip side, though, it feels like we've been here before, right? The last 2 months, we've gone into payrolls each time on the balance looking for upside surprises. And I think on the balance, the market's kind of in that mentality once again. And each time in the last 2 months, we've been disappointed. Much more so on the first print. You remember that was a real lowball number. Last month's came in a little bit better, but still was kind of lackluster against expectations. And so if that does happen, well, then it's kind of an overall reaction function of the show goes on for equities. Probably we continue to just claw away, slowly printing record highs. The Nasdaq's probably going to like that situation, the growth stocks. Um, gold obviously has been pretty hammered, in fact, since mid-June on that hawkish tilt from the Fed and subsequent pickup in some of the hawkish rhetoric. And that has seen gold put in the worst month in June performance going back since 2016. So although gold has bounced a decent amount over the last 2 days or so, there's definitely room for further upside if we were to get a very lowball number again because it just means that the strategy of the Fed to be patient and calm and not really react too much about talking up tightening at this point is the right one to adopt at this point in time. Keep in mind that it is hawks that are making hawkish comments, so hence the reason why it's fairly contained in terms of the market reactions to their, their commentary of late. Um, in terms of what people look at, of course, is kind of the, the job indicator buildup going into this. We've got a bit of a mixed picture. The employment section of the US main service sector survey, so the PMI, service PMI, dipped in May to 55.3 after hitting a 3-year peak in April, while ISM Manufacturing Employment Index dipped just below 50. And that, of course, is symbolic of it moving back into contraction territory. On a more positive note, though, obviously this week we have private sector employment ADP and that did come in showing a pretty robust 978,000 job gain in May. And first-time employment claims have continued their decline. The jobless petitions— and what we look at is the 4-week moving average— that fell below 400K for the first time since the pandemic has struck. So counterforces, if you like, if you're trying to kind of have a, a foresight of how this might play out. In terms of the actual expectation here, the headline is expected to 700K. We've got a range of 376 to an upside top-end, most bullish estimate of 1.05 million. And so for me, this, this provides a good framework, I think, for trying to determine the type of reaction you're looking for. I certainly think to see that scenario that I discussed of equities seeing kind of some downside if we see the dollar pop and those pairs get weighed on and gold get hit, I think we've got to be seeing a headline figure of around 1.25 to 1.5 area plus, I think, to see that type of decent intraday reaction. Um, yeah, obviously the other components of the report have got to fit that narrative as well. So maybe if you had a bit of a pickup in average earnings, average hourly earnings, and the unemployment rate drops more than expected. That would all be uniform then of a really solid report, and that's going to make people a bit apprehensive about Fed moving more increasingly hawkish. Uh, so definitely with equities up at record highs, obviously they, they are a bit susceptible here given the kind of positioning of late to a bit of a pullback. Don't get me wrong though, I don't think that would necessarily detract my view that you'd find some support lower down and I wouldn't see it as a dramatic sell-off, but intraday it could feel quite heavy. So on the flip side, yeah, if we get 3.76 is the bottom end of the headline range, and there will be a lot of emphasis on, on the headline, you know, in years gone by there's been a lot of focus on things like average hourly earnings and things like that. I think the show right now is on the headline. And so 3.76, I think you've got to get a number of kind of, yeah, more like 2.50 If we get a 250 print and unemployment rate still remains on the high side, say 5.9%, then I think then, yeah, equities actually— you might get the dip and drive initial reaction. Oh, this is bad. Oh, it puts off the Fed and we rally. And in that situation, you might get yields come under some pressure. T-note might go bid and gold might bust through those previous highs from yesterday and continue to move to the upside. Part of this recovery we've had of late. So yeah, that's it for now. I am going to be covering, um, the full non-farm payroll report from 1 PM London time on the Amplify Trading YouTube channel. So if you just search Amplify Trading on YouTube, subscribe to the channel, click on the bell icon, and you'll get an alert as soon as we go live. If you'd like to see some of our traders trade the event and talk to them while they're doing it and watch what they're doing, check out AmplifyLive.com. Our man there, Tim, will be steering the ship for the community, and you'll be able to chat to him as he does, as he goes about his business in real time. And that's it. So hopefully I'll see you online later. Um, good luck to Andy Murray. Firstly, he is third up on center court, but I think he's playing the number 10 seed today, and big test, but then even more important is for England and the football at the weekend. And so come on England, bring it home, let's go! And with that, I wish you a good weekend. Thanks guys.