We look at why a divergence emerged in stocks, bonds and FX on Thursday and what it means ahead of non-farm payrolls. Despite the 2% fall in the S&P 500, the Canadian dollar was the top performer and ranges were tight. A few indicators and a central bank speech will be released in Asia. A new set of Premium Insights will ve issued prior to the Nonfarm payrolls to leverage existing trades.
A few factors contributed to the stock market selloff:
The failure to make a deal (so far) in Argentina
More trouble at Portugal's Banco Espirito Santo
The sense that the Fed will eventually turn more hawkish
Earnings, to some extent, but there are always good/bad earnings
What undermines those factors is that the FX and bond market didn't react in unison. It's rare for stocks to lead a genuine risk rout so until we see more evidence, we're unconvinced it will last.
So the main factor might have been the end of the month. Fund managers hate to show losing trades and a trickle of window dressing might have turned into a flood as the move gathered momentum. At the same time, the Chicago PMI at 52.6 compared to 63.0 added a fundamental worry to the picture.
What's interesting is that despite the poor PMI, the employment component actually increased in July and that bodes well for Friday's non-farm payrolls report. There's some risk that a very strong report will stoke worries about rate hikes but ultimately more jobs will be seen as good news.
The market will continue to hunker down ahead of NFP but in the meantime some headlines could keep markets moving. The main one will be the Chinese official manufacturing PMI at 0100 GMT. The consensus is for a slight improvement to 51.4 from 51.0.
Thirty minutes later Australian PPI data for Q2 is due. Inflation concerns are low at the RBA and the report probably won't change the picture.
The final event to watch is a speech from BOJ leader Kuroda at 0330 GMT. The latest data has been weak and he could take a dovish line in an attempt to weaken the yen.
|Nonfarm Payrolls (JUL)|
|235K||288K||Aug 01 12:30|
|52.6||63.0||62.6||Jul 31 13:45|
|Markit Manufacturing PMI (JUL)|
|57.3||Aug 01 13:45|
|ISM Manufacturing PMI (JUL)|
|56.0||55.3||Aug 01 14:00|
|51||Aug 01 1:00|
|50.7||Aug 01 1:45|
|Producer Price Index (Q2) (q/q)|
|0.9%||Aug 01 1:30|
|Producer Price Index (Q2) (y/y)|
|2.5%||Aug 01 1:30|
Ashraf's webinar starts today at 16:30 Eastern Time (21:30 London) “Currency, Debt & Equity Markets with Fari Hamzei (stocks, indices and market timing) CLICK on REGISTRATION LINK. After registering you will receive a confirmation email containing information about joining the Webinar.
New York traders filled the thermos with coffee ahead of a busy day that started with ADP employment. The report added little to the debate at 218K compared to 230K expected. It was a small miss but close enough to expectations to keep the good news on the jobs front intact.
The surprise came shortly afterward when the first reading on Q2 US GDP was +4.0% compared to 3.0% expected. Q1 was also revised to 2.1% from 2.9%. There were some caveats in the report including a large build in inventories but the overall picture was strong and the US dollar climbed 30-80 pips across the board.
Like we warned, the market has repeatedly bet on a hawkish shift at the Fed and the non-stop talk ahead of the announcement was that it might finally come. But once again Yellen failed to deliver. The statement acknowledged some improvement in the economy but emphasized a significant underutilization of labor resources.
The good news for the hawks was a nod that inflation has moved somewhat “closer” to the long-run objective. The immediate reaction was still disappointment and the dollar pared a portion of its gains.
Ultimately the Fed remains on a slow path toward a more hawkish policy and that will drive the US dollar higher but you have to wonder if now's that time. For instance, USD/JPY has risen in 9 consecutive sessions and it might be a time for a pullback.
The headlines in the hours ahead will focus on Argentina. The country is in last minute negotiations to avoid a default. It's a complicated situation and the market has leaned heavily in the past two days toward a positive solution but anything is possible.If Argentina defaults it will ultimately be contained but it might give markets an excuse to retrace some recent moves.
|GDP (Annualized) (2Q) [P]|
|4.0%||3.0%||-2.1%||Jul 30 12:30|
|GDP Price Index (2Q) [P]|
|2.0%||1.8%||1.3%||Jul 30 12:30|
|ADP Employment Change (JUL)|
|218K||230K||281K||Jul 30 12:15|
The market will be transfixed on the news and releases in the day ahead but below the surface a little-talked-about trade might be poised to have a bigger impact.
Chinese shares have surged 6% in the past week and some related products have seen massive volume spikes. Rumors of market liberalizations are fuelling the gains but we wonder where the money is coming from.
Over the last two years money flooded into Europe and propped up the euro but that money might be looking for a new home. Fund managers like Bill Gross have proclaimed the end of the bull market in periphery bonds as Spanish 10-year yields fall below 2.5%. Lately, equities have also cooled off.
Could that hot money be leaving Europe and heading for China? That sort of flow would help explain the persistent weakness in the euro and strength in the dollar.
It's something to monitor but for now the focus now shifts to a number of major releases. Markets will begin to simmer with the release of June prelim Japanese industrial production at 2350 GMT. The consensus is -1.2% m/m and -5.2% y/y. Soft employment and retail sales data yesterday raised risks for further easing from the BOJ and kept the yen under pressure despite risk aversion.
That will be followed by German CPI, ADP employment, US GDP and the FOMC decision. Markets may be hesitant to react to any single release but watch for an extended move over the following days as traders digest the news.Ashraf previewed those events and more earlier.
|Industrial Production (JUN) (m/m) [P]|
|-1.2%||0.7%||Jul 29 23:50|
|Industrial Production (JUN) (y/y) [P]|
|1%||Jul 29 23:50|
|Retail Trade (JUN) (y/y)|
|-0.6%||-0.5%||-0.4%||Jul 28 23:50|
|Retail Trade s.a (JUN) (m/m)|
|0.4%||4.6%||Jul 28 23:50|
|Germany CPI (JUL) (y/y) [P]|
|0.8%||1.0%||Jul 30 12:00|
|Germany Harmonised Index of Consumer Prices (JUN) (y/y) [P]|
|0.8%||1.0%||Jul 30 12:00|
|Germany CPI (JUL) (m/m) [P]|
|0.2%||0.3%||Jul 30 12:00|
|Germany Harmonised Index of Consumer Prices (JUL) (m/m) [P]|
|0.3%||0.4%||Jul 30 12:00|
|ADP Employment Change (JUL)|
|230K||281K||Jul 30 12:15|
|GDP Annualized (Q2) [P]|
|3.0%||-2.9%||Jul 30 12:30|
|GDP Price Index (Q2) [P]|
|1.8%||1.3%||Jul 30 12:30|
The most important week of US economic releases before the “unofficial” start of summer is kicking off with a bang as US consumer confidence hit a fresh 7-year high in July at 90.9, following June's 86.4. Consequently, the US dollar extends its 3-week winning streak ahead of the week's key figures. Full charts & analysis.
|CB Consumer Confidence (JUL)|
|90.9||85.3||86.4||Jul 29 14:00|