US Non-Farm Payrolls Preview & Debt Ceiling Update

Okay, very good morning to you. It's Friday the 8th of October. I hope you've had a good week so far. And before I kick off with the normal proceedings, just a reminder, as I always do, it's Friday and that means that there's going to be a new Market Maker podcast from AmplifyMe. I'm going to chat to Head of Trading Piers after payrolls, so the episode's going to come out a little bit later today. But don't forget to jump on Apple, Spotify, Google Podcasts, whichever platform you, you use, search for it and subscribe and you'll get that episode as soon as it comes out. It's basically where me and Piers have a bit of a pub chat, really trying to make it interesting, talk about some of the major themes. So today we're going to talk about Facebook and the situation they're facing from a regulation point of view with a lot of the leaks that we saw in the Wall Street Journal earlier this week, as well as the outage that they had for 3.5 billion users. We'll talk about things like Russia and gas and the energy crisis at the moment. And then we'll talk about nonfarm payrolls as well. So check that out. Otherwise, let's get straight to it and talk a little bit about the charts this morning. And as you would imagine, things are relatively quiet and that's very reminiscent of what we normally see on the morning of nonfarm payrolls. And so I'm going to jump straight in with payrolls, really. Let's just get straight to the action and talk about what we can expect from that. Don't forget as well, I am going to be covering payrolls live right here on the YouTube channel. So I'm going to go live at around 1:15. So don't forget to subscribe to the YouTube channel, hit the bell icon, and you'll get notification as soon as I go live. And what I'll do is I'll probably do a preview, cover the live event, and then do a bit of a post-mortem of the, the outcome for 15 minutes or so, then grab a couple of questions off you guys. So love to have you on board. But in terms of payrolls, what can we expect? So last time out, as you can see here, a real lowball surprise, 235,000. And, you know, obviously the labor market has been overall over the last several months a little bit slower to return than perhaps a lot of people had initially been anticipating. Inflation definitely is ticking the box at the moment. The Fed needs to crack on with its tapering process, the process of reducing its monthly bond buying. And that does look pretty assured at this point in time. And so we are expecting a rebound in this number. So this 235,000 is expected on the kind of median consensus on Wall Street banks to jump back up again. The summer wave of COVID-19 cases has actually started to decline. As you would have heard me mention before, when media is not talking COVID, it's because case rates are going down and it's a lesser narrative to spin from a sensational perspective that generally generates clicks. So, you know, COVID cases are going down when you're not really hearing a great deal about it at this time. But if you actually look at the curve, it's heading in a, in a good positive direction at the moment, which is lower in North America after that kind of summer outbreak that we had, particularly in certain specific states. So what does that mean? Well, that's going to fuel demand for more high-contact services. What I mean by that's things like dining out, shopping. And of course, this then positions the Fed to be a little bit more proactive, as they have done in vocalizing their intentions to, to commence tapering. So the headline is expected at 500K. Always super important, though, is to be aware of the range of estimates. This gives you that remit then as to what might define the type of size of market reaction that you might see. And at the low end, the most pessimistic estimate is 250,000. The most optimistic is 700,000. And one of the things in this September— this September employment report is the last one available before the highly kind of anticipated November, early November meeting that the FOMC will have, which is where Powell most recently told reporters, I quote, it will take a reasonably good employment report, close quote, to meet the central bank's threshold for reducing its bond buying program. I had a question already on Twitter, someone asking me, what the hell does reasonably good mean? And it's a valid question, but therein is the art of central banking. You're not going to commit to a specific figure because that would be almost doomed to fail. So reasonably good, as far as most banks are concerned, is probably anything that's above the bottom end of the street. So remember, today's expected at 500,000. Most banks I've been reading are saying that anything at 250 or above, which again is the worst case scenario as far as analysts are looking for today, would be enough to cement November. So it would take a real lowball downside negative surprise to really make people question, okay, maybe it's not so assured that November's the kind of kickoff for tapering. So I'm talking like a 100K, 50K print, something like that, which is definitely not what's expected. Um, so yeah, the, the leisure and hospitality sectors, as you would imagine— I was just talking about the fact that COVID's coming more under control, there's going to be more kind of contact-based retail behavioral changes which can be more positive for that particular sector, of course. Um, so that's expected to bounce back after what we had seen, which was a fall of 42,000 in that area actually in the month of August. So things like restaurants, bars, and things should see a meaningful uptick this time around, or at least that's what's expected. Also as well, there should be a rebound in hiring in retailers as we go into the holiday season. Don't forget, we've got things like Thanksgiving looming, the build-up to Christmas, and, you know, many on the high street are expecting demand to be front-loaded given the supply constraints, which might mean that presents are very difficult to get hold of closer towards the time of Christmas. And so therefore people purchasing upfront. And so we could well see a rebound in hiring based on the fact of those seasonal patterns. Government payrolls are also likely to have rebounded as well, something which we looked at before schools fully reopened in person for learning. However, one thing to be aware of is on the auto manufacturing side specifically. So when you get payrolls, there's the headline change in nonfarm payrolls, but then you get private payrolls, manufacturing payrolls, you get a bit of a breakdown. The manufacturing payroll number probably would have slowed, and that's likely being constrained by the chip supply shortage that we're still experiencing at the moment. And this is having a big impact in the auto manufacturing sector. And what we had in recent weeks was GM, General Motors, and Ford who've actually announced production cuts at some of its plants in September as they manage that chip supply issue as well. So there might be a little bit of a soft spot within the numbers, which otherwise should spring back a little bit from the weakness that was seen in the, in the prior month. The other thing, of course, which probably won't materialize now, but definitely as a consideration going into the fall and something which will support the Fed's kind of path towards tightening going forward, is the fact that federal government-funded benefits expired in September. And that affects around 6 million people. So now, now not receiving benefits, does that incentivize them now to get back into the workforce? Is that another supportive factor as well that means that even if the number comes out at 250, 300K, which is below expectations, does the Fed push on anyway? Probably most likely that they will, all things remaining equal. Of course, there's lots of things that can happen between now and, uh, 3rd of February— I think after 3rd of November when their next meeting is. So that's, that's payrolls. How might the market react? Well, it's a good question, and I'll go through this really in a lot more detail when we do the live event at 1:15 for the release at 1:30. But equities have obviously had this really powerful rebound over the course of the last 2 days. We did of course have the situation on Capitol Hill with the latest legislation in the US where Let me flip over. The US Senate approved, of course, legislation 50 to 48 to temporary— temporarily raise the federal government's $28.4 trillion debt limit to avoid the risk of default, of course, which was looming in just about 10 days' time. All they've done here— I talked about this yesterday— they've kicked the can. This is going to reemerge as a real issue towards the end of the year, probably late November. Because it's— I think this takes us through to around the 3rd of December. So what happens next? The Senate is what happened last night. So the Senate passed a bill, now goes to the House of Representatives. They'll hold a vote on Tuesday, all being well, which is anticipated. It then goes to the president to be signed into law. The other thing then, and obviously this has been a positive factor that's helped that equity and sentiment recovery of this this week. The other thing then is oil, and oil has been on a tear. Of course, we've had a really strong rebound actually over the course of the last day. If I just bring that up, we saw energy prices overall kind of peter out. Gas obviously got hammered on the back of the pledge from Vladimir Putin, the Russian president, to kind of open the taps a little bit to confront the issue in the gas market. But oil as well, which We looked at on the weekly before, from a technical perspective, had a nice rejection initially up at around that $79.85 level, looking at the weekly bars on the, the WTI continuation chart. But we're right back up there again today. So after that decline that we had midweek, we've now come all the way racing back on, on Thursday. And actually, oil is headed for its 7th weekly gain, and that would be the longest run since December. US Energy Department said yesterday, and what's helped cultivate this about-turn in markets, which I was talking about yesterday in the briefing, was opening up the Strategic Petroleum Reserve, the SPR. And now the Energy Department is saying it has no plans at this time to tap the nation's oil reserves. And so despite those comments from the Energy Secretary, again, they're kind of like words shot across the barrel to just to warn the market that they're ready to do so. I don't think that they would at this point. I was talking about yesterday, analysts that say JP Morgan running their financial models were basically suggesting that all things being considered and all variables in the economy, the market economically can handle prices well north of say $100 and up to $130, $150. So I find it hard to see that, that the US would act on the SPR at this point in time at these levels. I would anticipate it would need to be much higher. For me, it's again politically, it's strategic. Biden needs to make these noises in order to show that he is being mindful to the pressures felt for the consumer and then pivot the optics to put the pressure on the Gulf producers to take action to deflect the blame away from his administration. So a lot of bark at the moment, not a lot of bite. I would expect that to remain the case, which actually keeps things in a relatively bullish mindset for the time being. The other thing overnight that's happened actually that helps the oil narrative is in China, we did have the Caixin Services and Composite PMI data, and that actually both returned quite aggressively into expansionary territory. As you can see here, we had a really lowball number last time out and it's flickered back quite aggressively. Both new orders and employment bounced back into expansionary territory. And just like I was talking about in the general leisure and hospitality sector in the US, with the more control of COVID on cases declining, we've had similar case kind of in China. They were experiencing as well a bit of an outbreak, but what we have been seeing is, um, the major outbreak in the eastern province of Jiangsu has been easing as well, and that's just helped things a little bit on that front. So new orders, as I said, employment bouncing back, helping lift that service data in China. However, I would say inflation is still at the forefront of a lot of people's minds. On that Chinese data, on the cost front, input prices rose for the 15th straight, straight month, and they increased at a faster pace on rising labor, freight, and raw materials costs. So that inflation element definitely has still not gone away. So it's kind of bullish for oil short-term, energy, but certainly keeps yields on the front foot. And obviously the 10-year really has suffered this year— excuse me, this week— as yields have continued to rise with this idea that inflationary expectations are continuing to, to move to the upside at the moment. Of all the products actually for non-farms, perhaps it's the 10-year where if we did get that worst-case unlikely scenario of a really bad report in payrolls, so unemployment up, job creation south of, say, 100, then there's definitely room for the 10-year to kick back up here, given the downward move that we've seen through this kind of inflation trade that's been really dominating the price action throughout the best part of this week. Certainly from an equity perspective, if we did get that, a lowball outcome, then does that make people a bit apprehensive about November? Well, you know what happens, the worse it gets, the more equities like it. So I'd probably look for the NASDAQ to outperform actually in reaction on the back of that. Major mega-cap tech obviously has suffered on this inflation recalibration in markets, if you like, and that would probably benefit most if we got a really bad payrolls report today. So definitely I'd expect that to flip back up and reclaim and test up around the R1 in the futures, which would be up at yesterday's raise higher levels. If we get a decent number, I don't think necessarily stocks sell off because remember that was a general play that would have been enforced a few months ago. And the reason for that is, is that November is pretty baked in now. And so the market, I think, has reacclimatized to the fact that it is going to happen. But as I said, we're going to go over payrolls in a lot more detail a bit later on. All right, well, just to wrap things up. What have we got on the calendar for this morning? Uh, not a great deal at all really. Um, just having a quick look if there's any other headlines since I've been going that have come out. The only other thing is data earlier this morning, German exports, a little bit on the softer side, -1.2%. Expectations were for +0.5%. Otherwise it's just a holding pattern really now until payrolls comes out, and that of course is at 1:30. Uh, and then That's pretty much it. Speaker-wise, Eastby's Panetta speaking at 2, and at a separate event talking about international trade and macroeconomics at 2 is Bank of England leading dove, uh, Tinrero. So that is it, guys. Don't forget, check out the podcast coming out. Feel free if you, if you're, if you've got time to join me on YouTube at 1:15. I'll do the whole payrolls show live, and then otherwise, if I don't speak to you before then, Have a fantastic weekend. All right, cheers guys.