Advantage China Ahead of Trade Talks

Non-farm payrolls were good enough to sooth recent economic nerves, while keeping rate cuts in play but the market will now quickly shift its focus from economics to trade negotiations, resuming Thursday. China is already signalling it is opposing the terms under Trump's broad trade deal. Sunday remarks from hawkish FOMC dissenter Esther George indicating her readiness to turn dovish if the facts change.  CFTC positioning data showed an extension of bets against the Australian dollar. Fed Chair Powell speaks again on Tuesday. The minutes of the Sep FOMC meeting are due on Wednesday.

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US jobs report had something for everyone. The headline at +136K was slightly softer than 145K expected but the prior two months were revised a total of 45K higher. Unemployment also fell to 3.5% from 3.7% -- a 50-year low. On the wages side, US earnings rose only 2.9% y/y compared to 3.2% expected.

For equities it was an ideal report because it showed the economy remains strong but low wages mean the Fed doesn't need to hike. That led to a 41 point rally in the S&P 500 to erase all but 0.9% of the weekly loss. DOW30 had a late 100-py push towards the 26580s mentioned in Friday's piece here. Bonds and FX were torn by the good-and-bad parts of the report and stuck closer to unchanged.

That unease is also a symptom of the US-China trade talks starting Thursday. Leaks are already revealing some of the fault lines, including a report suggesting that China won't consider reforming industrial policy or government subsidies.

The report ties the hardening stance to the impeachment crisis facing the President and suggests China suddenly feels like it has the upper hand. If they have miscalculated, it could lead to a spectacular blow-up. Expect a tepid tone until there is some clarity.

CFTC Commitments of Traders

EUR -66K vs -61K prior GBP -77K vs -81K prior JPY +14K vs +13K prior CHF -12K vs -11K prior CAD +6K vs +5K prior AUD -52K vs -47K prior NZD -42K vs -45K prior

The market was relatively stable for the second week. That highlights a wait-and-see attitude around US-China trade talks and the global economy. One position that extended was the short-AUD bet and it comes at a time when risks to both sides of the trade are high.