Trading Notes – Why the Payrolls report needs to be strong

KEY DRIVERS

• US economic data dominates trading decisions this week. With focus intensifying on economic performance in the wake of the FOMC meeting last week, every key data release will be poured over for its implications on a potential December rate hike. This is likely to now be a game that the market will continue to play until the Fed does actually bite the bullet and hike rates. It is debatable whether the Federal Reserve, which is apparently close to increasing interest rates, will view an economy that is driving a manufacturing PMI at 50.1 (i.e. basically no growth) and inflation failing to pick up (core PCE) as being ready for lift off. There are two payrolls reports between the October and December FOMC meetings and surely both will need to be strong in order to justify a Fed rate hike on economic grounds. Whether the Fed ultimately chooses to hike because it is “now or never” is another argument though.

• That means that the Employment Situation report this Friday is crucial. Headline Payrolls would surely need to be above 200,000 (current expectations is around 180,000), with possibly the more important Average Hourly Earnings picking up by +0.4% for the month (expectations of around +0.3% currently), whilst a stable or higher participation rate (above 62.4 from last month ideally) and also unemployment steady or lower (around 5.0% or lower perhaps). This would constitute a strong payrolls report that the Fed could justify as pointing to as showing progress on several fronts.
• However there are other data points to look out for, starting with the Factory Orders this afternoon which have been deteriorating for months now (hitting the forecast -0.9% for the month would be a month on month negative number for 9 months of the past 12). Look also at the ISM Non-manufacturing which has been strong in recent months but is on a declining trajectory and is forecast to show a third straight month of decline (to 56.5), whilst a move below 55.7 would be at least an 18 month low.
• In the wake of the FOMC meeting that put December back on the table as a possible meeting to hike, the dollar has strengthened and after a mild retracement is now looking to strengthen again. The moves on the dollar will be data dependent though (see the correction on Thursday/Friday last week after the GDP and PCE disappointments). The euro is the main currency to be impacted by this after the ECB signalled a potential extension to easing next month. ECB jawboning is starting again, with Governing Council member Nowotny seemingly taking on board the lead role currently. If this continues it is likely to pull the euro lower again. However I still do not see the euro as falling dramatically lower and expect the range above $1.0810 to continue, albeit now below the medium term pivot band $1.1050/$1.1100.
• Equities have been on a tear in recent weeks but after a strong October rally, with key resistance levels fast approaching on indices, I am mindful of some near term profit-taking. The way the ECB is prepared to ease further should be supportive for DAX and CAC. This could set the stage for a nice rally through to the new year, however very near term the technical position is looking a touch stretched and this could drive some profit-taking.
• Commodities remain under pressure from a strong dollar (especially precious metals) and concerns over China. The outlook for gold has completely flipped and silver is also corrective too now below $15.50. Oil remains rangebound above key support levels but last week’s sharp rally needs to continue otherwise the bears will start to see some opportunities again.
• Aside from the US data, watch out for the Bank of England’s “Super Thursday” of monetary policy, meeting minutes and Quarterly Inflation Report. The voting make up will be key as will the changes to the BoE’s forecasts for growth and inflation. Both of these will drive expectations of a rate hike. Current expectations are saying Q2 2016 (which would most likely be May as it is a “Super Thursday” meeting). If there is an increase in hawks (possibly Forbes and/or Weale) then this could drive expectations of an earlier hike possibly.
• Watch for: ISM Non-Manufacturing, Non-farm Payrolls

MARKETS

EUR/USD – The old pivot band $1.1050/$1.1100 is now a band of resistance      

• Jawboning the euro lower should help to keep a cap on gains, whilst volatility will be driven by the US economic data.
• A strong dollar has dragged the pair below $1.1050/$1.1100 key pivot level and this now turns into a key resistance area as the euro trades in the lower half of the medium to longer term range $1.0810/$1.1465.
• Watch for: ISM Non-Manufacturing, Non-farm Payrolls

GBP/USD – A near term correction below $1.5400 opens a minor correction again

• This could be a volatile week with the key US data and the Bank of England “Super Thursday” which will be a big driver of sterling. I still see the two central banks basically in lock-step so the moves on Cable will be near to medium term of time horizon before retracements kick in and I see the continuation of the range play above the $1.5100 support.
• Breaking below $1.5400 has opened $1.5300 and with support at $1.5240 and $1.5200 I see the move as being short term.
• Watch for: ISM Non-Manufacturing, BoE monetary policy, Non-farm Payrolls

USD/JPY – Continue to play the 118/121.70 range with the pivot around 119.60  

• There is likely to be some volatility around the US data points but whether this drives a breakout from the near term range play 120.15/121.50 could depend on whether the surprises come in the same direction.
• The medium term range 118/121.70 continues and but this has tightened to 120.15/121.50 and technical indicators are increasingly neutral. There is a pivot level around 119.60.
• Watch for: ISM Non-Manufacturing, Non-farm Payrolls

Gold – If the bearish momentum continues there could be a retreat to $1104

• A strong dollar and expectation that December could be a viable meeting for an FOMC rate hike has put gold in reverse again. The moves will be data dependent in the coming days with Non-farm Payrolls historically being an especially volatile day for gold.
• Breaking below $1136.50 confirms the negative medium term outlook again and downside support initially comes with an uptrend channel low around $1121 but on a price support basis not until $1104. The resistance comes in at $1150 now.
• Watch for: ISM Non-Manufacturing, Non-farm Payrolls

Indices – Comments from ECB members over extension of QE will help drive Eurozone equities   

• S&P 500 – The rally shows little sign of stopping on Wall Street but is now not far off the resistance band 2115/2135, with strong momentum (which is bordering on become a touch stretched now). Support band is now around 2060/2080.
• DAX Xetra – The DAX is trying to break higher, but cannot quite break the shackles of the 38.2% Fibonacci retracement at 10,850. The momentum indicators look strong still but the RSI is still around 70 and any excuse to take profits could drive a correction. Support in at 10,700.
• FTSE 100 – The index remains stuck in a bit of a quagmire of concerns over commodities and financials. This means the FTSE 100 is struggling to match the gains of the DAX or S&P 500. It is turning into a bit of a range play now with resistance at 6488 and support at 6268.

WATCH OUT FOR THIS WEEK

Tuesday 3^rd November

• US – Factory Orders
• New Zealand – Unemployment

Wednesday 4^th November

• China – Services PMI (Caixin)
• UK – Services PMI
• US – ADP Employment Report
• US – Trade Balance
• US – ISM Non-manufacturing
• US Crude Oil Inventories

Thursday 5^th November

• UK – Bank of England Monetary Policy and Quarterly Inflation Report
• US – Weekly Jobless Claims

Friday 6^th November

• UK – Manufacturing Production
• UK – Trade Balance
• US – Non-farm Payrolls
• US – Unemployment & Average Hourly Earnings

NEXT WEEK

Sunday 8^th November

• China – Trade Balance

Tuesday 10^th November

• China – CPI
• UK – BoE Inflation Report Hearings

Wednesday 11^th November

• US public holiday – Veterans Day
• China – Industrial Production
• UK – Unemployment/Average weekly earnings growth

Thursday 12^th November

• Australia – Unemployment
• US – Weekly Jobless Claims
• US – JOLTS job openings
• US Crude Oil Inventories

Friday 13^th November

• Eurozone – Q3 GDP (flash)
• US – PPI
• US – Retail Sales
• US – University of Michigan Consumer Sentiment (prelim)

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