With the Fed failing to meet market consensus in September (in cutting the pace of its bond-buying programme), the upcoming US payrolls print could set the platform for momentum for a new wave of tapering calls. As things stand the probability of a December tapering exercise seems low, and Chicago Fed president Charles Evans made mention of that yesterday when he said it was ‘very difficult to feel confident in December’ given the fiscal debate in Washington. Mr Evans is not the only one to say words to this effect, despite the September FOMC meeting being ‘a close call’, and the rhetoric of late has largely centred around waiting to see the impact the government shutdown has had on the economy.
USD could see good buyers on a strong payrolls report
This has kept the USD week of late and why I think we are unlikely to see a major move higher in the currency until we get clarity of how January or February pans out. Still, the really forward-thinking traders will be saying to themselves the USD is oversold, and asking what happens if we see agreement in Washington in the new year and perhaps even more miraculously a budget (a fate which hasn’t happened in over four years)? Mix that with a couple of payroll figures above 175,000; continued calm in emerging markets; a pick-up in the mortgage market; plus signs that inflation could actually be starting to do what they feel it will do and move higher. Perhaps then we could hear of a major policy change in March 2014, although as usual the USD, bond yields and equities will have probably already have had a sizeable move by then.
Asian markets have largely gone through the motions; I mentioned yesterday that there were signs of number of red flags for the contrarians, price action still hasn’t provided the much needed confirmation that a pullback is on the cards. Certainly the ASX 200 continues to move higher and has printed a new five-year high for the third day in a row. Of course solid production numbers from BHP (currently up 2.5%) have been the backbone here, and while its copper and petroleum divisions look fairly healthy, this is a story about iron ore. There haven’t really been any strong signs of rotation from the banks into BHP, and those long will be hoping for a break of the August 15 high of $37.41. As long as BHP finds buyers, then downside seems fairly limited for the overall benchmark.
No real reaction to China house price data
China and Japan are seeing modest sellers, but it’s hardly dramatic. Perhaps we could see a pick-up in volatility in Japan tomorrow, as USD/JPY (and to a degree USD/CHF) is probably the G10 pair most in play on today’s US jobs numbers. China’s home prices once again showed strong gains in 69 of 70 cities and showed a ninth month of year-on-year gains (+9.1%). Without breaking down the different cities, the headline rate eased a touch on the month from August; however the market won’t be concerned with that. All eyes fall on Thursday’s HSBC ‘flash’ manufacturing numbers and while there isn’t any consensus traders could still react, especially as the hotter house prices will only add to inflation forces, which in turn are back on the market’s radar after PBOC advisor Son Guoqing talked about tightening policy somewhat if inflation stays above 3%.
The reaction in AUD/USD has been relatively limited on China’s September house prices. Now having reached the projected target of the multi-month head and shoulders pattern, a potential top could be in play. I have taken profits on short EUR/AUD positions, which I talked about back on 11 October (for a 120 pips gain), while I have also closed out my short AUD/NZD trade for a small loss after breaking through the March 14 downtrend. EUR/USD looks less than convincing with clear indecision (as seen in the ‘doji’ pattern) seen on the daily chart.
So all eyes now fall on the US payrolls with consensus at 180,000 jobs (range 256,000 to 100,000), while the unemployment rate is expected to remain unchanged at 7.3%, with the participation rate a key concern. Hourly earnings are expected to grow at 2.1% on the year. The probability is we see a number between 160,000 and 185,000, in which case we probably won’t see a huge reaction, although from a playbook perceptive we will need to see a number below 120,000 to witness a sharp reaction in the S&P and US ten-year treasury.
A number above 200,000 could feasibly materialise given the low levels of initial jobless claims at the time and I actually feel this would be taken well by markets, despite subtracting from the case for continued QE. Global markets remained buoyed on stimulus; however what we really need is growth and jobs to remain the backbone of that call.
European traders likely to sit on their hands
European markets will no doubt also follow Asia’s lead with traders sitting on their hands, although modest losses should be seen. US earnings will stay in focus with Freeport McMoran (FCX), Whirlpool and Coach some of the interesting names to watch out for. FCX is expected to earn 52 cents or revenue of $5.96 billion, but it’s worth highlighting it has a strong pedigree at earnings season, having beaten on EPS and revenue in eight of the last ten quarters. Apple as well will be in focus, given it has rallied for nine straight days (its best run since October 2010), and should detail its new iPad range ahead of earnings on October 28.