Originally published by Rivkin Securities
The US saw a fairly quiet session on Thursday as investors eagerly anticipate the non-farm payroll report due on Friday. Both the yields on the two & ten-year government securities were little changed at+1.2086% and +2.4755% respectively, as a result the U.S. dollar index was relatively unchanged against a basket of currencies, up just +0.04%. US equity markets were also flat, with the S&P 500 closing +0.06% higher while the Nasdaq 100 closed -0.10% lower.
Following a significantly higher ADP employment report during the week as well as initial jobless claims on Thursday remaining below 300,000 for the 100th straight week, the chance of non-farm payrolls topping estimates are skewed to the upside. Forecasts are for 175,000 jobs to have been created in the month of January, well above the 100,000 estimated to keep the unemployment rate stable based on population growth.
The probability calculated by Fed Fund Futures currently suggests the first rate hike of 2017 will occur at the June 14th meeting. However a strong reading in the payrolls data above 200,000 coupled with a rise in wage growth could put the March 15th meeting in serious contention for a hike despite uncertainty around the potential flow on effects from Trump’s stated economic policies.
Elsewhere the Bank of England kept monetary policy unchanged at a meeting overnight. While no changes were anticipated, the focus was on a press conference by Governor Mark Carney and the quarterly inflation report. Given the UK economies recent resilience in the wake of the Brexit referendum, the BOE raised growth forecasts, raising 2017 to +2.0% from +1.4% previously and 2018 to +1.6% from +1.5%. Inflation forecasts were little changed, Q1 2017 is expected to be slightly higher at +2.0% from +1.8% previously while Q1 2018 is forecast to be lower at +2.7% from +2.8% previously.
In spite of the positive forecasts the pound dropped -0.93% with bond yields as both the two and 10-year yields decreased -2.7 & -6.9 basis points respectively. The first chart below shows the pound making an initial pullback after rallying 6% over the past fortnight towards resistance at the 1.2800 level. This move came on the back of comments from Governor Mark Carney dampened the view the BOE may need to raise rates sooner rather than later given rising inflation warning of “twists and turns” as the UK withdraws from the EU.
Locally the Australian dollar spiked shown on the first chart below with bond yields following the largest trade surplus on record. The Australian dollar traded +1.03% higher as both the two and ten-year yields gained +2.1 and +4.1 basis points respectively. The trade surplus rose to $3.51 billion in December well above the forecast $2.2 thanks to a +5.3% increase in exports, with exports to China rising +28%. The data suggests a rebound in fourth quarter GDP after a softer third quarter reading and provide the RBA with some comfort to keep rates unchanged in the near-term.
Locally the S&P/ASX 200 closed -7.73 points lower (-0.14%) at 5,645.43 and this morning we can expect a slightly stronger start to trading with ASX SPI200 futures up +6 points in overnight trading.
Data releases:
· Japanese Nikkei Services & Composite PMI (MoM Jan) 11:30am AEDT
· Chinese Caixin Manufacturing PMI (MoM Jan) 12:45pm AEDT
· Euro-zone Services & Composite PMI (MoM Jan) 8:00pm AEDT
· U.K. Services & Composite PMI (MoM Jan) 8:30pm AEDT
· Euro-zone Retail Sales (MoM & YoY Dec) 9:00pm AEDT
· U.S. Non-farm Payrolls, Unemployment Rate & Average Hourly Earnings (MoM Jan) 12:30am AEDT
· U.S. ISM Non-manufacturing Survey (MoM Jan) 1:45am AEDT
· U.S. Durable Goods Orders (MoM Dec) 2:00am AEDT
Chart 1 – GBP/USD (Daily)
Chart 2 – AUD/USD (Hourly)
