Market Drivers February 3, 2017
Europe and Asia
GBP: UK Services PMI 54.5 vs. 56.2
EUR: Final Svc. PMI 53.7 vs. 53.6
North America
USD: NFPs 8:30
USD: ISM Non-Manufacturing 10:00
The yen went on a wild ride is Asian session trade while sterling continued to be pounded on the London open in a generally active overnight session before today’s key release of US NFPs.
After a week holiday, Chinese markets were back to work and PBOC began by tightening in its Open Market Operations. USD/JPY which rose steadily for most of Asian trade, hit 113.00 and dropped sharply, probing the 112.50 level within minutes.
But as quickly as it fell the pair spiked once again after BOJ announced that it was buying 5-10s JGBs in unlimited quantities. It has been BOJ policy to keep the rates on 10-year JGBs at or near 0% and the recent spike in rates forced its hand. The news promptly dropped the rate and once again spiked USD/JPY above the 113.00 figure where it remains ahead of the NFPs.
Meanwhile, in UK, the PMI Services printed worse than expected coming in at 54.5 versus 56.2 the month prior. In its analysis of PMI Markit stated:
”The main area of concern is the extent to which companies’ costs are rising across the economy, with the rate of inflation accelerating to a pace not seen since before the global financial crisis. There is evidence that higher costs are deterring some companies from taking on extra staff, with the January surveys finding employment to have increased at the slowest rate since August. Only construction companies stepped up their hiring at the start of 2017.”
Today’s report continues to suggest that UK growth may have peaked in the post-Brexit environment as inflationary pressures begins to build through the system. The latest batch of UK data has shown a deceleration in growth and with the trigger of Article 50 now a foregone conclusion, the slowdown may continue as European businesses begin their exodus from British Isles.
Sterling has been a relative weak trade all week long and that dynamic could continue today especially if the US NFPs beat their mark. Having broken below 1.2500 GBP/USD could test 1.2400 if US numbers prove especially strong.
The market expectations for today’s NFPs are slightly higher than the month before but still below the 200K mark at 170K. The very strong print from ADPs which suggest that the NFPs could be 220K or more have given dollar bulls some room for hope, but the two reports are not perfectly correlated and have diverged in the past.
Given the 4.7% unemployment rate, the more important data point will be the average hourly wages number. The Fed will very likely look to that report in determining if a March rate hike is warranted. The market is looking for a 0.3% rise after last month’s 0.4% gains.
Another good print could boost USD/JPY and send it towards 114.00. However, any miss will add to the dollar's woes as currency traders will become convinced that the Trump trade has lost its luster and liquidation could start in earnest with 112.00 once again being tested.