Sample Category Title

The Institute for Supply Management (ISM) manufacturing index rose 2.5 points to 58.8 in August, marking a twelfth consecutive monthly expansion and nearing the cycle high. The reading came in well above the consensus view, which called for only a modest improvement to 56.5.

Most subcomponents improved on the month, with inventories (+5.5 to 55.5) and employment (+4.7 to 59.9) leading the way.

Production (+0.4 to 61) improved slightly, new orders (-0.1 to 60.3) remained relatively steady, while the backlog of orders improved 2.5 points to 57.5 - matching a March cycle high.

Given little movement in new orders and a surge in inventories, the spread between the two - useful as a leading indicator of activity - was cut in half, but at 4.8 still remains supportive of future growth, albeit slower, in the sector.

The biggest pullback was recorded in customers' inventories which fell 8 points to 41 - bringing the index back to 2011 levels. At the same time, trade indicators edged lower, with exports falling another 2 points in August, while imports reversed part of last month's gain (-1.5). Nonetheless, both remain within the 55-point range, indicating decent growth in trade activity.

The prices paid subcomponent held steady at 62 - widening the gap from year-ago levels to 9 points from 7 points previously.

Fourteen of the eighteen industries reported expansion in August, with Textile Mills, Petroleum & Coal Products, and Machinery registering the strongest expansions on the month.

Key Implications

Results from today's ISM survey confirm that the U.S. manufacturing sector continues to expand at a robust clip. The details of the report provide further comfort as nearly all of the subindices, except customers' inventories, remain in healthy territory. At the same time, most industries recorded an expansion on the month, while comments from the survey respondents remained broadly positive.

In the near term, the sector is likely to go through some volatility given the effects of Hurricane Harvey on Southeast Texas. The affected area is home to a large concentration of the refining and chemical industry, with the pause in activity expected to weigh on the sector, and on nondurable goods manufacturing as a whole. As the aforementioned industries return to full capacity, we expect to see a boost in manufacturing activity in the following quarter. Meanwhile, cleanup and reconstruction efforts are likely to deliver an added boost to manufacturing in subsequent quarters.

Overall, we remain optimistic about manufacturing's prospects over the medium term, given improving global growth and a weaker U.S. dollar - with the greenback giving back more than its post-election gains. That said, this narrative will require a stable political backdrop and more certainty as far as trade agreements go - both factors that could weigh on prospects.

USD/JPY - 110.28

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 110.03

Kijun-Sen level                  : 110.04

Ichimoku cloud top             : 110.40

Ichimoku cloud bottom      : 109.47

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback slipped in US morning on US NFP data, below 109.41-47 (previous resistance and 50% Fibonacci retracement of 108.27-110.67) is needed to signal top has indeed been formed at 110.67 yesterday, bring further fall to 109.15-20 (61.8% Fibonacci retracement) and possibly towards 108.95-00, however, reckon 108.55-60 would remain intact.

In view of this, would be prudent to stand aside for now. Above 110.50 would suggest the pullback from this week’s high of 110.67 has ended, bring retest of this level but only break there would signal the rise from 108.27 low has resumed and extend gain towards previous chart resistance at 110.95 later. 

USD/CHF - 0.9625

Most recent candlesticks pattern : N/A

Trend                                    : Down

Tenkan-Sen level                  : 0.9590

Kijun-Sen level                    : 0.9605

Ichimoku cloud top                 : 0.9640

Ichimoku cloud bottom              : 0.9556

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The greenback only slipped to as low as 0.9547 in US morning before finding renewed buying interest (missed our long entry at 0.9540), this anticipated rebound signals an intra-day low has been formed there and consolidation with upside bias is seen for gain to 0.9640-50, however, break there is needed to signal the pullback from yesterday’s high of 0.9680 has ended, bring retest of this level, break there would confirm the rise from 0.9428 low has resumed and extend headway to 0.9698-99 resistance first.

In view of this, would not chase this rise here and would be prudent to buy dollar on subsequent retreat. Below 0.9575-80 would risk another test of 0.9547 and possibly support at 0.9539, however, only break there would shift risk to downside and signal the rise form 0.9428 has ended, then weakness towards 0.9500 would follow. 

GBP/USD - 1.2960

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2951

Kijun-Sen level                    : 1.2930

Ichimoku cloud top              : 1.2913

Ichimoku cloud bottom        : 1.2893

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As cable has rallied after finding renewed buying interest at 1.2905 today, justifying our bullishness, the breach of indicated resistance at 1.2979 adds credence to our view that early rise from 1.2774 has resumed, hence mild upside bias remains for this move to extend gain towards 1.3000 which is likely to hold on first testing and price should falter below previous resistance at 1.3032.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below 1.2930-35 would risk test of said support at 1.2905 but only break there would signal top is formed instead, bring subsequent fall to 1.2875-80 and later towards said support at 1.2852.

EUR/USD - 1.1880

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1915

Kijun-Sen level                  : 1.1908

Ichimoku cloud top             : 1.1945

Ichimoku cloud bottom      : 1.1876

Original strategy  :

Sold at 1.1975, met target at 1.1875

Position : - Short at 1.1975

Target :  - 1.1875

Stop : -

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Although the single currency staged a brief bounce to 1.1980 in NY morning after NFP, as renewed selling interest emerged there and euro has dropped again, retaining our bearishness for weakness to 1.1850, however, break of yesterday’s low at 1.1823 is needed to signal the fall from 1.2070 top has resumed and extend decline to 1.1815-18 (61.8% Fibonacci retracement of 1.1662-1.2070) but downside should be limited to 1.1790-00 and support at 1.1773 should remain intact. 

As we have taken profit on our short position entered at 1.1975, would not chase this fall here and would be prudent to stand aside for now. Above 1.1940-45 would suggest an intra-day low is formed instead, bring another test of said resistance at 1.1980 but only break there would signal the fall from 1.2070 has ended at 1.1823 yesterday, bring further gain to 1.2000 and possibly towards 1.2025-30.

• European stock markets gained slightly ground with the German Dax (+0.8%) and Cac40 (+0.8%) outperforming. US stock markets opened with small gains as well (+0.2%) despite a rather weak payrolls report.
• US August payrolls disappointed on all fronts. Net job creation printed at 156k (vs 180k forecast) and the previous two month's suffered a combined 41k downward revision. The unemployment rate unexpectedly ticked up to 4.4% and average hourly earnings rose slower than anticipated (0.1% M/M & 2.5% Y/Y).
• US factories ramped up in August to the fastest pace of expansion in six years, driven by employment gains. The US manufacturing ISM rose from 56.3 to 58.8, while markets expected a much smaller increase to 52.8.
• "Since the introduction of the euro, there were significant movements of the euro-dollar rate. We're now roughly where we were when the euro was introduced. We've been below parity and we've been at $1.50-$1.60. Therefore, I wouldn't over-interpret or dramatize," ECB Governing Council member Nowotny said.
• Lifting euro zone inflation may be more difficult than earlier expected, ECB Vice President Constancio said, days before the bank begins a much anticipated discussion on the future of its stimulus policy.
• ECB policy makers may not be ready to finalize their decision on next year's bond-purchase program until December, according to euro-area officials familiar with the matter (rumours).
• The August UK manufacturing PMI beat expectations, rising from 55.3 to 56.9 (vs 55.0 forecast). Companies reported the strongest intake of new orders since May, bolstered by the weaker pound. The currency's depreciation also contributed to purchase-price gains accelerating for the first time in seven months.
• UK trade secretary Fox has accused the EU of "blackmail" over Brexit divorce payments, capping off a testy week of negotiations. The comments come after Michel Barnier, chief Brexit negotiator for the EU, repeatedly bemoaned the UK's approach to the process, noting yesterday that "no decisive process" had been made in the third round of talks.
• Kenya's supreme court has nullified the result of last month's presidential election, in an unprecedented ruling that deals a severe political blow to incumbent president Uhuru Kenyatta. It means a new vote has to be held within 60 days.

Rates

Second failed test of 2.1% despite weak payrolls

German Bunds underperformed US Treasuries today. Core bond trading was neventful until around European noon. ECB Nowotny said that he wouldn't over-interpret or dramatize the recent euro strength. His comments triggered a setback in German Bunds with next week's ECB meeting in mind. Will Draghi and co already provide a blueprint for next year's APP programme (tapering)? Rumours suggested a delay until December, but the market didn't react that way. Intraday losses in Bunds were temporarily erased by a disappointing US payrolls report. US Treasuries benefited as well with a test of key support in the US 10-yr yield (2.1%). However, the move barely lasted 10 minutes with immediate return action toward pre-payrolls levels. The US Note future's performance was especially disappointing taking into account the upcoming long weekend in the US. Markets are closed on Monday for Labour Day which traditionally favours safe havens in the run-up.

A similar reaction to the payrolls was visible in the dollar. Both market reactions suggest that the downtrend in both USD and US yields seems to be exhausted. A period of consolidation is now more likely unless of course the ECB decides otherwise. An APP-announcement next week should for example send yields back higher.

The German yield curve bear steepens at the time of writing with yield changes ranging between +0.5 bps (2-yr) and +4 bps (30-yr). The US yield curve steepens as well, but to a lesser extent. US yields increase by up to 1.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal (-3 bps) outperforming and Spain (+2 bps) underperforming.

Currencies

Dollar ignores weak US payrolls

The US payrolls disappointed in all aspects. The dollar instantaneously lost ground, but the gains were rapidly erased. EUR/USD spiked from about 1.1920 to 1.1980, but retraced the gains and now trades below the 1.19 handle. Similarly, USD/JPY dived from 110.10 to 109.56 only to return back to the 110 level. There were and are doubts about the August payrolls, as a statistical quirk might be responsible for the weak results. That could explain the bizarre price action. Alternatively, the market reaction may be evidence that the downward dollar trend is exhausted for now.

The dollar initially gradually strengthened versus euro and yen during the European morning session. There was little news behind the movement. EUR/USD bottomed at about 1.1880 and was already somewhat higher when ECB Nowotny said that the complaints about a too-strong euro were overdone. German yields rose up to 4 basis points (US/German yield spread narrowed a few basis points) and EUR/USD spiked to 1.1930 before retracing part of the gains. The market reasons that the ECB may already announce its plans about the APP programme next week if they aren't too concerned about euro strength. The positive euro bias remained in place going towards the payrolls, while USD/JPY held on to its modest gains. The Nowotny comments were euro specific and these kinds of remarks should keep the euro market itchy in the run up to next week's ECB meeting.

The US August payrolls report was weak in its most important components. Payrolls rose 156 000 instead of the expected 180 000, July and June payrolls were downwardly revised by a combined 41k, the unemployment rate ticked up to 4.4% from 4.3% and the average hourly earnings rose a lower-than-expected 0.1% M/M and 2.5% Y/Y. It's not excluded that a statistical quirk was responsible for the weakness as is often the case in August. The dollar was sold, pushing EUR/USD in a first reaction to 1.1980 and USD/JPY lower to 109.56. However, the tide turned completely and the dollar losses were erased. The dollar tries to gain additional ground as we conclude our report..

Bloomberg reported: "ECB policy makers may not be ready to finalize their decision on next year's bond-purchase plan until just a couple of weeks before the current program expires, according to euro-area officials familiar with the matter". The message was released 10 minutes after the payrolls release. It is intrinsically euro negative, but given the moves in other dollar crosses and in other markets, we don't think it influenced trading.

Sterling strengthens against EUR after payrolls?!?

Sterling traded sideways in the morning session, ignoring an unexpectedly strong Manufacturing PMI. The headline PMI rose to 56.9 in August from 55.3 in July, a four month high. The improvement was broad-based (all main components) including strong export orders, suggesting that the weak pound is starting to help the economy. EUR/GBP kept close to the 0.9211 going towards the US payrolls release. Strange enough, cable didn't return gains after the weaker payrolls unlike EUR, JPY, …. This resulted in a significant decline of EUR/GBP, which fell in the afternoon from 0.9210 to 0.9150.

EUR/GBP - 0.9270

Original strategy  :

Buy at 0.9145, Target: 0.9295, Stop: 0.9105

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9115, Target: 0.9235, Stop: 0.9175

Position : -

Target :  -

Stop : -

 
Although the single currency has slipped again today and near term downside risk remains for the corrective fall from 0.9307 top to extend weakness to 0.9145-49 (38.2% Fibonacci retracement of 0.8892-0.9307), reckon 0.9110-15 would limit downside and bring rebound later, above 0.9220-25 would bring test of resistance at 0.9238 but a firm break above latter level is needed to signal the correction from 0.9307 has ended, bring retest of this level, break there would extend the major rise from 0.8304 to 0.9335-40 and 0.9365-70.

In view of this, we are inclined to buy euro on next corrective fall and would be prudent to exit on such rebound. Below 0.9095-00 (50% Fibonacci retracement of 0.8892-0.9307) would abort and signal top has been formed at 0.9307, bring correction of recent upmove to 0.9050-51 (61.8% Fibonacci retracement and previous support) later. 

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

August job gains of 156,000 and a steady rise in wages indicate continued economic growth and consumer spending. Hurricane Harvey hits next month's data. Past the cycle, structural unemployment issues remain.

August Jobs Up 156,000: Consistent with Economic Growth

Nonfarm payrolls rose 156,000 in August, with the three month average at 185,000 jobs. Job gains are consistent with 2.5 percent economic growth in the third quarter, steady consumer spending and Fed policy as currently projected for a December rate hike.

Hiring in the services sector remained solid, with gains in business services, education & health, finance and leisure & hospitality (top graph). Government jobs have declined on average 6,000 jobs over the past three months.

In the goods sector, manufacturing employment posted a strong gain (28,000) over the past three months, while hiring in construction was up a still solid 13,000 jobs on average over the past three months.

Wage Growth: Real Wage Gains Over the Past Two Years?

Despite the focus on nominal wage gains, the real story for the American household is that real wages continue to rise and thereby boost household real incomes and consumer spending.

Nominal average hourly earnings rose 0.1 percent in August and are up 2.5 percent over the year. While job growth remains strong, earnings continue to hang in this mid-two percent pace. The softer inflation readings and weak productivity numbers have limited the gains in nominal wage growth.

Over the longer run, wages reflect the economic fundamentals of the labor market, and those fundamentals include productivity and inflation (middle chart). Lackluster productivity growth in the current cycle has weighed on wage growth and will likely continue to hamper wage appreciation. Moreover, inflation has been persistently below the FOMC's target of two percent and has struggled to sustain upward momentum. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.

Structural Problems Persist: Drag on Growth

For any given unemployment rate (labor supply) the vacancy rate (job openings) remains wider than in the prior ten year period (bottom graph). This Beveridge Curve signals a structural weakness in the labor market which is confirmed by several labor market survey indicators. Compared to a year ago, the unemployment rate for those without a high school education and with a high school diploma remains higher than the unemployment rate for those with some college.

The mean duration of unemployment rate remains at 24.4 weeks which is higher than any level since 1982. Finally, the prime age labor force participation rate has risen over the last year but remains far below the level of participation since 1990.

GBPJPY has a neutral intra-day bias and has been trapped between the key round level of 142 and 143 today. Short-term momentum oscillators (on the 4-hour chart) are moving sideways, indicating the start of a consolidation phase in the market.

Looking at the bigger picture, GBPJPY declined from the August 3 high of 146.80 to reach a low of 139.30 on August 24. An attempt to rebound from the multi-month low found resistance at 143 as RSI reached overbought levels at 70 and upside momentum faded. The 143-level has acted as resistance in mid-August and so it's seen as a strong barrier to upside moves.

If support at 142 fails then GBPJPY would come under increased pressure with scope to reach the key 140-level and possibly re-test the low at 139.30. A deeper decline would suggest a top is in place at 143 and GBPJPY would resume the downtrend that started from the July 11 high of 147.77.

Alternatively, a sustained move above the top of the range at 143-resistance would indicate that the intra-day neutral bias has ended and prices would target 144. This could shift the short-term bias to bullish. Since the market is above the Ichimoku cloud and both RSI and MACD are in bullish territory, another push higher cannot be ruled out.

The underlying medium-term trend is neutral-to-bearish since July but it is unclear yet whether the bounce from 139.30 is a mere correction of the July-August downtrend.

USD/CAD - 1.2411

 
New strategy             :

Stand aside

Position: -

Target:  -

Stop:-

Although current break of 1.2414 support confirms our bearish view that recent decline has resumed and may extend weakness to 1.2340, then 1.2310-15, oversold condition should limit downside and reckon current wave v would be limited to 1.2250-60 and price should stay above 1.2200-10, risk from there has increased for a rebound to take place next week. We are keeping our count that wave v as well as wave (C) ended at 1.3794 and impulsive wave (i ii, i ii) is now unfolding with minor wave iii ended at 1.2414, followed by wave iv correction possibly ended at 1.2778, wave v should extend towards 1.2300.

In view o this, would not chase this fall here and would be prudent to stand aside in the meantime. Above 1.2445-50 would bring rebound to 1.2490-00 but break of latter level is needed to signal a temporary low is possibly formed, bring further gain to 1.2530-35 and then 1.2570-75 but upside should be limited to 1.2600 and price should falter well below resistance at 1.2663.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.