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NFP miss sets Asia up for a strong open

Friday’s non-farm payrolls (NFP) report noticeably underperformed market expectations and effectively killed off the outside possibility of a September rate hike by the US Federal Reserve (Fed).

Federal Reserve
Source: Bloomberg

The September rate hike speculation was mostly driven by the slew of suddenly hawkish Fed member commentary while actual economic data over the past few weeks has mostly missed expectations. But the combination of the ISM Manufacturing PMI dropping into contractionary territory and non-farm payrolls missing expectations should have likely put the September rate hike to bed. The base case for the Fed is for a hike in December, but there are only three more NFP reports until then and it only takes one more major miss like we saw in May to see that pushed out into 2017.

Of course, bad data means the underlying health in the economy is not good, and this ultimately drives earnings performance. And this does put investors in a contradictory situation as to whether they should be focusing on rates settings or the underlying economy. This indecision certainly seemed at play during Friday’s session, as stocks initially surged on the NFP miss, but then proceeded to pare back some of those gains. A similar phenomenon was seen in the DXY US dollar index, which dropped as low as 95.14 after the release, but ultimately closed Friday’s session higher by 0.2%. And US bond yields also closed the session higher with the ten-year yield rising by 2.7 basis points and the 30-year rising by 4.1 basis points.

DXY
Click to enlarge

Oil and gold were also major beneficiaries of the NFP miss with gold gaining 0.8% and WTI oil gaining 2.7% and regaining the US$44 handle, but over the weekend we have also seen some more upbeat comments about the prospects of an OPEC deal. Putin has come out to support a supply freeze deal and Iran’s Mehr news agency reported Deputy Oil Minister Amir Hossein Zamaninia saying that Iran seeks stability in the oil market 'while preserving its national interests'. OPEC Secretary General Mohammed Barkindo is also set to meet with Iran’s Oil Minister Bijan Zanganeh this week. So we could well be in for another week of OPEC deal jawboning.

August non-farm payrolls was a noticeable slowdown from the previous two months, and was not enough to push the unemployment rate down further from the current 4.9% level.

But the other big concern was the marked slowdown in hourly earnings growth, which increased by 0.1% month-month from 0.3% the prior month.

The decline in manufacturing jobs was apparently the biggest drag on August’s NFP number, which is consistent with the contractionary sub-50 read in the ISM Manufacturing PMI. The contractionary turn in the ISM PMI is quite concerning and is going to have to reverse quite quickly for a December rate hike to occur.

Asia-Pacific markets look to be heading higher today after the bounce in US equities on Friday and the turnaround in many commodity prices. The 0.7% rise in the USD/JPY rate on Friday alongside improved equity sentiment is setting the Nikkei up for a strong day as it looks to open more than 1% higher. While the bounce in commodities should provide a much needed boost to the underperforming ASX today.

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