Volatility clouds build ahead of the US payrolls

The Asian session has been marked by trepidation ahead of the Non-Farm Payrolls (NFP) number release this evening.

Jobs
Source: Bloomberg

The Nikkei continued to gain after an impressive performance this week, although volumes were down significantly. The ASX also pushed into positive territory after a volatile start to the session. Some of the cautious positivity seen in Asian markets may be positioning for a bit of a pullback in expectations of a December rate by the Fed if we do see the NFP number disappoint.

The risk of an inflationary overshoot really does not seem to be a concern for British and Australian central banks and yet the US Fed continues to play up their concerns. The Bank of England (BoE) forecasts showed that that they could keep rates on hold until 2017 with inflation only just entering the lower end of their target band. The argument being that with the global economy continuing to grow at below average rates and the UK economy growing from strong household and corporate spending, the counteracting effects on the inflation rate would stem its rise.

The Reserve Bank of Australia’s (RBA) Statement of Monetary Policy also showed that excessive inflation growth was also not a concern, and certainly would not be standing in the way of them cutting rates should they deem it necessary.

The question is then why are so many members of the Federal Reserve stressing the severe consequences of an inflationary overshoot as their argument for raising rates in 2015? The bond market is still pricing in a 56% chance of a December rate hike. But given US growth has clearly slowed in the third quarter and other central banks are increasingly less worried about inflation should the Fed really be so keen to raise rate?

Tonight’s Non-Farm Payrolls (NFP) number will have a huge baring on the market calculus for a December Fed rate rise. Expectations are for 185,000 new jobs, which is a significant step up from the 142,000 and 136,000 jobs added the previous two months. There has also been a huge move by the markets towards a December Fed rate hike since the Fed explicitly mentioned the date in their statement last week. The big rally we have seen in US bond yields and the Dollar Index have set the barrier very high for the NFP to please the markets.

One would think a number of 175,000 or less is probably going to see quite a bit of pullback in a lot of those markets just because of how much they have rallied over the past week and a half. Not to mention the initial market reaction to the statement will be driven by trading algorithms that are only going to see a beat or a miss of the estimates buy or sell based on how far it was from the estimate. With global markets on tenterhooks around the NFP release there is plenty of scope for some high frequency trickery – seen around the RBA decision on Tuesday when the AUD/USD moved 1.2% within a handful of seconds.

Statement of Monetary Policy

The RBA’s Statement of Monetary Policy did lower forecasts for inflation and GDP as expected. The forecast for 2015 GDP was lowered by 25 basis points to 2.25%, while CPI was lowered to 1.75% from 2.5%. The 2016 GDP forecast was unchanged.

The RBA explained in the statement that they now expected some of the large LNG projects to be delayed and this contributed to their similarly lowered 2017 GDP growth forecast. They also noted in the capital expenditure survey that mining investment was actually declining at a faster rate than had been expected. The depreciation of the Aussie dollar was helping fuel demand and investment in the services sector, however due to its labour intensive nature it was not helping spur significant non-mining investment. There does appear to be very little silver lining on the investment front.

But the RBA does seem to have been taken somewhat by surprise by the much slower than expected third quarter CPI. The RBA pointed to low fuel and utilities prices that were spilling over into the costs of other goods as the primary reason for the ongoing weakness in inflation. But dropping their 2015 CPI forecasts by 0.75% shows just how much the Q3 number has changed their calculus.

The RBA statement and Glenn Stevens’ dovish tone has led to increased speculation that we will see a rate cut by the RBA in early 2016. The bond market pricing probability of a February cut lowered slightly from 71.2% to 69.4%. But it does look like we will need to see some more data that would move the RBA’s 2016 GDP growth estimates down before a rate cut is guaranteed. At the current juncture, rates look to be kept on hold.

ASX

The ASX was hit with quite a lot of selling at the open as the poor performance in US markets overnight drove the initial trading here in Australia. But the ASX did start finding some support to move it higher after 11.00 AEDT. [shares:ANZ -AU|ANZ] went ex-dividend today, taking about 10 points out of the index as a whole. The banks were a key driver of overall market sentiment. After heavy selling yesterday, the banks looked to be finding buyers today after a pretty negative week and a half which saw the sector lose roughly 4-5%.

The strong US dollar overnight weighed on commodity prices, with both oil and iron ore seeing major falls. Despite that the materials sector has performed reasonably well. With Rio gaining 1.8% and Fortescue gaining 4.4%. BHP’s stock was sold off today after news that a dam had burst at one of its Brazilian mines.

Asciano’s stock rallied 6.4% after news broke that Brookfield had purchased a 15% stake in the company. Qube had previously purchased 20% of Asciano in hopes that it would be able to block its takeover by Brookfield. But Brookfield’s purchase today makes it clear that it is prepared to follow through with the deal even if it is forced to buy up. Brookfield’s total stake is now just under 20%; to get 51% of shareholders to agree to its takeover it now needs roughly 31% of shareholders to agree to its bid. Clearly the rest of the shares in the free float are going to be hot property as Qube and Brookfield battle it out.

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