Originally published by AxiTrader
Market Summary
US non farm payrolls printed a much weaker than expect 138,000 in May with a 66,000 reduction to job gains for the previous month. But that weakness wasn't enough to derail the rise in stocks with new highs for US markets.
Sure the unemployment rate fell to 4.3%. But that appears to be a result of people leaving the workforce.
Anyway the S&P 500 closed up 9 points to 2439, the Dow Jones Industrial Average was 62 points higher at 21,206 and the Nasdaq 100 was the strongest of the three big US indexes up 0.94% to 6,305 as the FANG stocks continue to drive the overall market moves. Germany had a stonking 1.25% rally and after a solid 50 climb Friday on the ASX200 SPI traders have marked prices another 10 points higher.
Stock mightn't care about the recent US data flow but Forex and bond traders have the result poor marks. That saw the 10 year Treasury trade to the low for the year. That, in turn, dragged the US dollar to its lowest level for the year as it collapsed through important support.
US dollar weakness was the tide lifting all boats on Friday with euro making a run at the US election night high and the Australian dollar finding strength in US dollar weakness. It's back above 74 cents comfortably as a result. The yen, pound, kiwi, and Swissie are all stronger as well.
Likewise gold caught a bid after weak non-farms and the fall in the US dollar and interest rates. It's broken the downtrend line from last years post-Brexit highs. Oil is lower again, and copper is drifting.
It's a big week ahead with the release of partial indicators and then Q1GDP on Wednesday. Before that we get the RBA on Tuesday.
The ECB is also going to be very important. But today it’s Markit services PMI day across the globe. It’s an important set of indicators.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 2439 +9 (0.37%) (7.41 Sydney - change since previous day)
- Dow 21206 +62 (0.29%)
- Nasdaq 6,305 +59 (0.94%)
- SPI 200 5,797 +10 (0.17%)
- AUDUSD 0.7424 (+0.67%)
- Gold $1278 (+1.13%)
- WTI Oil $47.66 (-0.83%)
International
- UGLY. There is no other way to characterise the 138,000 print for non-farm payrolls on Friday. That result was below the lowest estimate of the Reuters poll and when we throw in the 66,000 in the previous two months NFP prints (April now 174k and March 50k) the situation in US jobs market takes on a very different tone.
- That’s unlikely to sway the Fed in June though traders think based on market pricing (see Forex section below). But I have to say the Fed should be a little worried. The “transitory” nature of the dip in Q1 seems to have remained in place during Q2 based on the data we are seeing and where the US economic surprise index is at -40.3. But this weakness should give the Fed pause. The statement and Janet Yellen’s press conference are going to be very interesting. It would be a shock to markets if they don’t hike. But they should consider it and we’ll likely get a dovish hike if they do actually move.
- Naturally one of the big things they’ll be worrying about is the labour market tightness as shown by the new post-crisis low in unemployment of 4.3%. But the household survey that showed this fall also showed people exiting the workforce and a fall in employment rather than a fall in unemployment as a result of job hires. So it’s a mixed picture.
- US Trade data showed a bigger than expected deficit in April of $47.6 billion which was up 5.7% and will add to the drag on Q2 GDP in the US.
- Bonds in the US rallied Friday as a result of all of the above. US 10’s are now at 2.1590 which is below the bottom of the 2017 range and a technical signal rates could be headed substantially lower. US 2’s are hanging in at 1.29%. So this is a bull flattener on bonds but reflects a bearish view on growth as fixed income traders rethink the longer term outlook for the US economy.
- You'll notice I haven't mentioned the appalling attack in London over the weekend. It's because unfortunately financial markets have had to become used to these types of events and this is unlikely to have a direct impact on markets. It could impact the election on Thursday and that could impact markets via that channel. And naturally, my thoughts are with the victims and their families.
Australia
- Another solid day for local shares Friday with the S&P/ASX 200 up 50 points, 0.87%, to 5788. That’s a very solid bounce from the low at 5680 and left the market up on the week with a rally of 37 points. It has been a strong recovery and traders will be eyeing the 5798/5805 resistance region on the day.
- SPI traders marked prices 10 points higher at the close on Saturday morning so we’ll likely open in the zone.A break would be an indication this rally is not just a retracement from last week’s lows but has genuine support.
- Forex traders know that every trade is a relative one. So I’m wondering if the relentless rally in US and European markets hasn’t aroused some interest in the beaten down Australian market. A break of 5800 might suggest it has. And if that is the case there is a big catch up to be made by Australian stocks to the global rally.
- And on the data front today we get quite a bit of important data as we await the RBA tomorrow afternoon and Q1 GDP Wednesday. AIG performance of services industry, the MI monthly inflation gauge, ANZ job ads, and Q1 company gross operating profits.
- What’s really interesting about the data – intriguing really in context of the emerging debate around recession in Australia – is that the Citibank Economic surprise index is at 55.3. That’s the highest level since February 2016. It makes governor Lowe’s statement tomorrow afternoon a really interesting and important one in the context of data and the emerging debate.
Forex
- The US dollar has utterly lost it’s mojo as traders question the outlook for the economy. JP Morgan came out Friday and said it was sure the recovery in Q2 was going to happen along the lines the bank previously thought. That is something I’ve been highlighting with my constant focus on the US version of the Citibank economic surprise index which fell to -40.9 on Friday after the non-farms and trade data. That’s the weakest level since February 2016.
- The CME Fedwatch tool has June still at a 94.6% probability of a rate hike in 9 days or so. But traders are no longer so sure about the follow-up cut with only 10 of the 18 primary dealers surveyed by Reuters Friday saying another hike will be made in September. Like the Atlanta Fed’s GDPNow (which was downgraded from 4% to 3.4% Friday) that is likely to be subject to change as the data flows.
- So as the US dollar index closed below the 96.70/75 level I’ve been watching the Euro and other currencies caught a bid. The Euro is at 1.1273 and close to its highest levels since US presidential election night last November. US Dollar (JPY) is back at 110.34 and looking wobbly while the Australian dollar is off from Friday’s close but still above 74 cents at 0.7420 this morning.
- Sterling is still well supported at 1.2850/60 as traders await this week’s election. Results will be out in our timezone Friday. So it is going to be another fun day in Asia for forex traders as a result.
Commodities
- More messy trading on oil markets Friday with WTI collapsing from an open around $48.04 to a low at $46.74 before the buyers re-entered lifting prices back to $47.70 at the close. That’s encouraging price action as it is a clear reversal off important support and a bullish candle on the daily charts.
- But it was a solid move lower on the week as traders question just how effective OPEC’s production cuts will be. That’s something I’ve written about endlessly. Especially the fact that OPEC consistently sends behavioural nudges that it knows it’s losing the battle with the US oil industry (Baker Hughes reported that the rig count was up again . Take last week’s comments from “sources” that OPEC looked at and may revisit deeper cuts. Just a week after deciding not to do that it almost screams “we know it’s not working”. Indeed Saudi oil minister al-Falih said further cuts might be necessary. “If for some reason we need to do more, we will consider doing more including ... bigger cuts” Russia’s Tass newsagency is reporting (HT ForexLive).
- Inventories are falling, this is a long game, and my sense is OPEC will do what it needs to do to keep prices as high as possible. The groups fiscal position at an individual country level leaves them little choice but to pursue higher prices and in doing so budget/fiscal repair.
- Gold is higher this morning as bond rates drop and the US dollar comes under pressure. That’s lifted gold to $1279 and up and through the downtrend line from last years post Brexit highs. $1,295/$1,300 is the high for this year and where gold appears to be biased. A break of this level would be a sign of a much stronger pulse higher.
- Copper is fairly benign at $2.57 a pound a better performance of metals and iron ore on Friday.