Finally, it's Friday; let's run the payrolls. In this case, the US Nonfarm Payrolls. The NFP is always good for some juicy volatility intra-session, but this one will assume potentially greater importance than usual, as the headline result will go a long way towards solidifying financial markets' timing of the Federal Reserve taper. Well, that's the theory anyway.
As ever, the range of forecasts is far and wide, but the median consensus seems to be around 750,000 jobs added this evening. My thruppence worth, as a mere pilot fish cleaning the global market's shark’s teeth, is thus; a number lower than 600,000 jobs will push back tapering expectations from the Fed. That will see markets "buy everything" and sell the US dollar. A number nearer to 1 million jobs will have the opposite effect, sell everything and buy the US dollar, perhaps ships some bonds out the door as well. This scenario is likely to be more violent as the street has hitched its wagon to the first scenario this week. A number around expectations will be a bit of a meh for me, giving us no clarity one way or the other. The result will still be "buy everything", just less vigorously.
One development yesterday that has caught my eye was Democrat Senator (D) Joe Manchin's call for his fellow Democrats to pause the $3.5 trillion spending bill. Senator Manchin is the Democrat's swing vote outlier in the upper house, looking more red than blue much of the time. If Mr Manchin digs his heels in, the spending bill could become dead in the water from a vote’s perspective. That would be another blow for the taperers and could account for some of the US dollar selling yesterday, especially as the Initial Claims and Factory Orders data should have been US dollar positive at the margins. How this plays out is worth watching, perhaps more so than the impending debt-ceiling saga.
Now that's out of the way; we can turn to Asia. Australian Markit, Japan Jibun, and China Caixin Services PMIs for August have been released today, and all have disappointed. In the case of the Jibun (42.9) and Caixin (46.7), they have missed severely. We can lay Delta-variant lockdowns and restrictions at the doors of all three. It highlights the struggles the Asia/Pacific is having with Covid-19 and the vulnerability of Covid-zero countries to the more transmissible Delta variant. China aside, with the rest of the region struggling to get their vaccination programmes of the launch pad, let alone into low earth orbit except for the exceptional Singapore, it highlights once again that Asia's recovery will now lag the Northern hemisphere heavyweights into Q4. That is especially so for ASEAN, and once again, if the taper trade gains momentum, the region's currencies will be in for a very tough Q4. A large scale outbreak in China requiring extended mass lockdowns is another potentially gruesome headwind for the region to watch out for as Delta is changing the game.
Australian Retail Sales plunged by 2.70% as the NSW and Victoria lockdowns sap demand. Australian markets continued to look through that situation as transitory. They were further boosted by the announcement that Britain will "lend" its former colony 4.0 million Pfizer (NYSE:PFE) doses, arriving in the next week. That is 4.5 million secured this week so far, and for once, ScoMo is having a good week as PM. Singapore's Markit PMI fell to 52.1 today, still expansionary. The reopening of the economy from recent restrictions and its stellar vaccination programme should leave Singapore as an out-performer in Asia for the rest of the year. Retail Sales will probably be flat later today, but that should be the nadir of the data for 2021.
Pan-Europe Eurozone Services PMIs are released this afternoon as well. They should outperform, in contrast to Asia. After yesterday’s huge rise in Eurozone PPI MoM for July to 2.30%, we will hear more inflationary fighting rhetoric from Northern Europe officials. It's a strange old world indeed when we talk about inflation concerns and Europe in the same sentence after 15 years, but here we are. It should be enough to keep the rally in the euro, and by association, the sterling, going strong.
Given that the ECB has moved to a very dovish stance with their new inflation target methodology, next week's ECB policy meeting could be more frisky than usual. I will ponder this one over the weekend as we need to move past today's NFP first. I am contemplating some changes to the PEPP now and a lot of Germanic table-slapping at the meeting.
Looking ahead into next week for Asia, China's trade data will be the centre of focus. Close behind will China's CPI and policy meetings from the Reserve Bank of Australia and Bank Negara Malaysia. Of the two, the RBA will attract the most attention, with the burning question being, will they delay their QE tapering? Liquidity will be thinner than usual on Monday as US markets are closed.
Equities creep higher pre-payrolls
US equity markets edged higher despite US Initial Jobless Claims falling to a post-pandemic low. After the weak ADP Employment earlier this week, markets, always looking for a reason to FOMO-buy, have set their stall cautiously in a lower Nonfarm, more distant Fed taper corner. The S&P 500 rose 0.28%, and the NASDAQ edged 0.14% higher, with the Dow Jones rising by 0.37% after a tough couple of days. US futures on all three continue to move higher in Asia, increasing by around 0.20%.
That cautious bullishness has translated into an uneven day in Asia, posting a very mixed regional performance. In Japan, the Nikkei 225 has rocketed 1.90% higher as the retail fast-money army puts its cash behind more stimulus measures from the government ahead of an expected October election. The KOSPI is also higher, rising by 0.75%.
In China, the Caixin Services PMI slumped, sending the Shanghai Composite down 0.50%, with the CSI 300 slipping by 0.10%. Hong Kong has fallen by 0.75%. Singapore is unchanged, with Kuala Lumpur edging 0.15% higher, while Taipei has rallied strongly by 0.80%. Bangkok has jumped by 1.05%, while Jakarta is 0.25% lower. Another 4 million vaccines on the way have helped Australian markets rise today. The ASX 200 has climbed by 0.70%, while the All Ordinaries has rallied by 0.80%.
Once again, against a background of pre-Nonfarm caution, local markets have been left to their own devices, with the more "tech-facing" North Asia bourses outperforming once again. There is no consistent theme in Asia at the moment, although that may change next week. After a small rally in New York, European stocks should be happy to take their cue from Asia and open higher. Gains will be limited ahead of the US data, however.
The US dollar retreat continues
The US dollar fell yesterday with hawkish inflation comments from European officials pushing the euro higher and leading the US dollar sell-off. The dollar index fell by 0.31% to 92.21 as currency markets, perhaps more than any other asset class, have placed their stall in a delayed taper. Asia appears content to wait Friday out ahead of the US data, with the index unchanged today so far.
EUR/USD rose 0.30% to 1.1875 overnight as inflation noise continued ratcheting higher. A rally through 1.1900 will signal a retest of 1.2000 next week. Sterling rose through its 200-day moving average (DMA) at 1.3810 yesterday, on its way to a 0.47% gain to 1.3833. The close above 1.3810 is significant, especially as news outlets are running tax increase stories. Assuming a soft Nonfarms, GBP/USD could well test 1.4000 next week.
Both AUD/USD and NZD/USD outperformed yesterday as risk appetite remains firm in currency markets. AUD/USD rose 0.45% to 0.7400, and NZD/USD rose 0.45% to 0.7110, climbing through its 100-DMA and closing just under its 200-DMA at 0.7115. With more vaccines on the way to Australia and Covid-19 cases falling once in New Zealand, there aren't many reasons to be bearish. If New Zealand's lockdown strategy continues to deliver, the RBNZ rate hike will be back on the cards in October. NZD/USD could rise to 0.7300 next week, assuming the Nonfarm Payrolls doesn't upend the narrative.
USD/Asia is quiet today with Asian currencies mostly content to edge slightly higher versus the greenback. I expect that to remain the status quo for the rest of today's session with the potential direction of US monetary policy of far more importance to regional Asia at this time than other areas of the world.
Currency markets look locked and loaded to deliver a further general US dollar sell-off into the end of the week and into next, as long as the US Non-Farm Payrolls come in on the soft to middling side. Therein lies the danger, though. If the data surprises to the upside, there could be a lot of painful US dollar short culling into the week's end. Hurry up and wait is the preferred strategy.
Oil rallies post-OPEC+
With OPEC+ done and dusted, and the US dollar remaining soft, oil markets rallied strongly yesterday. As the dust settles, though, both Brent and WTI have remained roughly in my preferred, if noisy, trading ranges for the week as traders scramble to find the most nebulous of news stories to explain intra-day price moves.
Brent crude rose by 2.15% to $73.80 yesterday, with WTI leaping 2.20% to $69.75 a barrel. In Asia, both contracts have crept higher to $73.00 and $69.80 a barrel, respectively. Notably, Brent crudes 100-DMA today at $71.10 a barrel, held every sell-off this week, and prices remain constructive as long as that continues. WTI has had a much choppier range, complicated by Hurricane Ida considerations, but seems to have found plenty of support on those short forays to $67.00 this week.
We can ponder the global supply/demand balance and its implications for oil prices next week. In the meantime, we have a US Nonfarm Payrolls release and a US holiday on Monday to negotiate first. Consequently, I anticipate Brent crude continuing to trade in a $72.00 to $74.00 a barrel range ahead of the data, while WTI should chase its tail noisily between $69.00 and $71.00 a barrel.
Gold on hold
Gold has another Sleepless in Seattle session yesterday, closing almost unchanged once again at $1812.50 an ounce. Gold bulls should probably be a little concerned though, US yields have edged lower this week, and the US dollar has fallen quite a lot, yet gold prices have not been able to rally. That reinforces my fears that the V-shaped recovery momentum in gold prices has stalled.
Although gold remains confined to the tender embrace of its 100 and 200-day moving averages at $1814.80 and $1809.35 an ounce, respectively, gold is now set up for a solid directional move into the end of the week. Given its inability to continue rallying, the risks are skewed to the downside. If the US Nonfarm Payroll data exceeds expectations, gold could suffer an ugly sell-off today.
At this stage, resistance at $1820.00 and particularly, the $1830.00 to $1835.00 an ounce zone look more than capable of capping rallies. A fall through $1800.00 an ounce will see gold retest support at $1780.00 an ounce. If things get ugly, gold could fall as far as $1750.00 an ounce as stale long positioning heads to the abattoir.