Intraday Market Thoughts Archives

July non-farm payrolls disappointed with a rise of 162K jobs, undershooting expectations for 195K. On the positive side, the unemployment rate fell to 7.4%, the lowest level since December 2008. So what will the doves and hawks at the Fed decide? Chart & analysis

Click To Enlarge

Taper talk restarted on upbeat US economic data and optimism about non-farm payrolls. The US dollar was easily the best performer while the yen languished. A light calendar in Asia leaves room for consolidation in the hours ahead.

On Wednesday it was an upbeat ADP report, today it was Initial jobless claims falling to the lowest since 2007 and the ISM manufacturing employment index jumping to the highest in a year. The combination, along with a very strong ISM overall, sent USD/JPY through 99.50 to a one-week high.

The strong numbers also led traders to re-adjust expectations for non-farm payrolls. The consensus remains 185K but whispers about a number at 210K more accurately reflected market expectations. One caveat we hold is that the Fed wasn't particularly upbeat about jobs and officials likely had a preview of the data.

In any case, initial jobless claims often give a better picture of the trend in US employment rather than the revision-heavy NFP report.

Coming into the session, the market was focused on Draghi's press conference, speculative about new dovish leanings but he didn't deliver. All the main points of policy were unchanged, including forward guidance, a balanced view of inflation and downside risks to growth. One overlooked statement was the assessment of credit, which Draghi indicated would improve on cyclical factors. This diminishes the risks of another LTRO to stimulate lending.

EUR/USD was slightly lower after the press conference but that reflects broad US dollar strength rather than dovishness. On the crosses, the euro was a solid performer.

Most dollar trades ended Thursday at the extremes of the day but some consolidation is likely in order as traders square up ahead of NFP. The calendar features Australian Q2 PPI at 0130 GMT; the prior reading was 1.6% y/y. A rate cut from the RBA next week is almost fully priced in and a high reading on inflation pressures could cause a re-think.

The doves at the Fed should be stressed at this charts below. This is in reference to the song "When Doves Cry", which merits no intro. Today's release of 326K in US jobless claims (lowest since Jan 2008) and the 55.4 reading in July manufacturing ISM (2-year high) must both be added to the 6 reasons the Fed should taper asset purchases in September, published in yesterday's piece. Here is on the ECB's forwad guidance and where the BoE will follow.  Full article and chart

Click To Enlarge

In a day rife with revisions, the Fed also must revise its FOMC statement, indicating the conditional intention to taper purchases, specifically this year. Here is why and how.

Signs of compromise on tax reform from the White House could add an unexpected spring to the dollar's step. The Swiss franc was the best performer on Tuesday while the Aussie lagged. A series of second-tier releases are unlikely to garner attention ahead of US GDP and the Fed.

The US dollar finally found its legs on Tuesday after a week of struggles. One of the catalysts was a surprise proposal from Obama for corporate tax reform in exchange for one-time jobs boosting programs. The proposal would drop efforts at individual tax reform but more importantly, it's a surprisingly large first step toward a compromise that would end the sequester, spur the US economy and boost the dollar.

The dollar rally came despite some slightly soft economic data. American consumer confidence was at 80.3 compared to 81.3 expected. The S&P/Case-Shiller house price index rose 12.2% compared to 12.4% expected.

Positioning was also a factor as traders prepare for the wave of economic data and central bank statements that will end the week. The pound was under particular pressure, dropping more than a cent in US trading to 1.5224.

The Australian dollar showed no signs of rebounding after a dovish speech from Stevens moved RBA rate cut expectations to 90%. AUD is just 60 pips from a cycle low against the dollar and has broken support against a number of other currencies. Barring a surprisingly dovish Fed and a turnabout from the RBA, further support levels will break.

One of the larger movers on the day was oil. If the July rally in oil prices was quiet, the slide to $103 from $109 has been nearly unnoticed. It's a challenge to find reasons to buy oil with the IMF forecasting global growth at 2.2% and emerging markets struggling.

Highlights upcoming in Asia-Pacific trading include the Japanese Markit manufacturing PMI, Japanese labor cash earnings and Australian private sector credit. It's difficult to imagine markets reacting to the data with US Q2 GDP just a few hours away followed by the FOMC.  We remind that the GDP numbers could be tricky to read because of massive benchmark revisions.

Discussing the upcoming decisions from the Fed, ECB, BoE as well as GDP, NFP and the race for Fed chief between Janet Yellen and Lawrence Summers. Full interview

A blockbuster week of economic data heats up with Japanese employment, industrial production and a speech from the RBA Governor. On Monday, the yen was the top performer while the kiwi lagged after last week's rally.

US pending home sales were a lone highlight in a quiet day of trading that underscored the anticipation of the central bank decisions and data on the calendar later this week. Sales rose 9.1% y/y, falling short of the 11.5% expected.

The euro struggled to climb above 1.33 and then slipped back to 1.3239 before rebounding to the middle of the range. A story about the Bank of Italy closely inspecting the balance sheets of 8 banks may later prove important. The central bank loosely audited bank capital earlier in the year and ordered several banks to form larger buffers. The second look suggests they could have found some trouble or irregularities. Italian bad loans have risen for 27 consecutive months.

Turning to Japan, which has seen stock prices wipe out a month of gains in the past three days, the government appears to be taking a cautious tone on growth. Nikkei reports the FY2014 official growth forecast is 1%, that's about a half-point weaker than the consensus. The critical factor will be Abe's decision on the sales tax.

The next stage of moves in the FX market will be dictated by data. That begins with Japanese jobs at 2330 GMT and industrial production at 2350 GMT. The latter report is generally more of a market driver but the Nikkei will be key.

The other event to watch is a speech from RBA Governor Stevens at 0305 GMT. The OIS market is pricing in a hefty 77% of a rate cut next week and Stevens could wish to manage those expectations.

Ashraf's webinar on “Currency, Debt & Equity Markets Timing” with George Cavaligos (bonds & Elliott Wave) & Fari Hamzei (stocks, indices and market timing) will be held on Thursday, August 1^st at 3:30 PM - 5:30 PM Chicago time, 4:30 pm-6:30 pm New York,  9:30 pm-11:30 pm London. Register free here  After registering you will receive a confirmation email containing information about joining the Webinar. SEATS ARE LIMITED

Press reports about German banks and Merkel's flagging popularity threaten the euro. The best performer last week was the yen while the dollar lagged. A busy week of economic news begins with Japanese retail sales.Early moves in the market are miniscule but traders could focus on German banks and politics.

Der Spiegel reported on Sunday that several German banks face new write-offs and may need to raise more capital. They did not cite sources but said the prolonged shipping downturn has hurt some German banks. Also in Germany, a Enmid poll and of German elections on Sept 22 showed Merkel's coalition trailing a coalition of opposition parties by one point.

The week begins with the Japanese June retail sales report at 2350 GMT. The consumer has been unexpectedly strong this year and June numbers are expected to continue the trend with a 0.8% m/m rise.

The bigger question for Japanese consumers is whether Abe will go forward with a sales tax hike planned for April. Following his election win last week, he said it will be a “difficult decision.” Which countered his prior statements that the tax will go ahead.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -28K vs -37K prior JPY -87K vs -86K prior GBP -50K vs -37K prior AUD -64K vs -70K prior CAD -17K vs -20K prior NZD -2K vs -3K prior CHF -5K vs -5K prior US Dollar Index longs at 28K vs 29K prior