NFPs and the week ahead

By David Morrison  |  02/11/2018 15:29

US Non-Farm Payrolls rose 250,000 in October, well above expectations. But along with strong wage growth the worry now is that the Fed will continue to raise rates to prevent the US economy from overheating

The rally in US stock index futures continued Friday morning. Traders reacted to a Bloomberg report that President Trump is ready to reach a trade agreement with Chinese President Xi Jinping at this month’s G20 meeting in Buenos Aires. Mr Trump has apparently asked officials to begin drafting up potential terms, although this was later denied by a ‘senior administration official’.

Mid-terms approach

But prior to the denial, several commentators had expressed the cynical view that the US President is only making friendly gestures to boost investor sentiment and keep stocks elevated ahead of Tuesday’s mid-term elections. After all, Trump has repeatedly hitched his administration’s wagons to the stock market rally since his surprise election in November 2016. In addition, such positive spin contradicts recent evidence which showed that the two powers were far from reaching any deal. The major sticking point, and the main reason for Trump’s tariffs, concerns cybersecurity and intellectual property theft. Underlining the importance of this issue, on Thursday the US Department of Justice (DOJ) charged a state-owned Chinese firm and its Taiwanese partner (United Microelectronics) for allegedly stealing trade secrets from Micron Technology, the largest US memory chip maker.

Apple sells off

But the US/China trade news trumped fourth quarter results from Apple. After Thursday’s close the tech giant slumped 7%, despite strong earnings, after it reported weaker-than-expected iPhone sales. On top of this (and like Amazon last week) Apple offered up weak forward guidance. The company also said it would no longer report iPhone, iPad and Mac unit sales. Usually, news like this, from the world’s largest company by market capitalisation, would have been enough to send the whole tech sector lower and have a negative spill-over effect on the wider market. But it is perhaps an indication of ‘buy-the-dip/fear-of-missing-out’ sentiment that investors chose to ignore such a worrying signal.

Non-Farm Payrolls

Friday’s US jobs report surprised to the upside. October Non-Farm Payrolls came in at 250,000 – well above consensus expectation of 193,000. The Unemployment Rate held steady at 3.7% and remains at a seventeen-year low. Meanwhile, Average Hourly Earnings rose 3.1%. This was in line with forecasts but topped the 3% mark for the first time since April 2009. The strong data has raised fears that the US economy could start to overheat, particularly as corporations continue to get a boost from the Trump administration’s tax cuts, repatriation of overseas profits and other fiscal measures. While this is just one data release, it reinforces the Fed’s own forecast that there will be 100 basis-points worth of rate hikes between now and the end of next year. This means that the market will have to push up its own rate hike predictions to come closer to those of the US central bank.

Muted reaction initially

Financial markets showed little immediate reaction following the release. It was almost as if someone had pulled the plug from the ‘black box’ trading algos. However, it wasn’t long before the major US stock index futures began to give back their overnight gains. This saw the NASDAQ 100 slide over 100 points to start the new session in negative territory.

Watch 2,700 on the S&P

This week saw the S&P 500 surge above resistance around 2,700 and a close above here would keep rebound hopes alive. The next big resistance area comes in around 2,760/70 which corresponds to the 200-day moving average which the S&P has failed to close above since 18^th October. But if the rally fades going into the weekend and we see 2,700 broken to the downside, there’s a strong possibility that the US majors will struggle when they reopen on Monday.

Key economic data releases next week:

Monday – GBP Services PMI; USD ISM Non-Manufacturing PMI

Tuesday – AUD Reserve Bank of Australia rate decision and statement; USD Congressional Elections; NZD Unemployment Rate

Wednesday – NZD Reserve Bank of New Zealand Rate decision and statement; JPY Bank of Japan Summary of Opinions

Thursday – CNY Trade Balance; EUR EU Economic Forecasts; USD Federal Reserve rate decision and FOMC statement

Friday – AUD Reserve Bank of Australia Monetary Policy Statement; CNY CPI, PPI, New Loans; GBP Preliminary GDP, Manufacturing Production; USD Producer Price Index, Consumer Sentiment, Inflation Expectations.
 
 
Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.