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US nonfarm payrolls a massive miss

Friday's Non-Farm Payrolls dished out a huge surprise, rolling out a gigantic miss to the downside as the US economy added only 235,000 jobs. Despite a sizeable upward revision of 133,000 to the previous month, nothing was going to offset the shock of the miss in the headline data. Household employment performed strongly, helping to push the employment rate down to 5.20%, but retail jobs fell. At the same time, government construction rose only slightly, with business services and transport saving the headline number.

The sweep of the delta variant across the US has clearly impacted travel and leisure demand and has possibly seen many Americans hold off returning to the workforce. It contrasts with various jobs vacant surveys, which clearly show employers screaming to hire and average hourly earnings, also released Friday, rose by a higher than expected 0.60% MoM.

I'll not postulate the underlying reasons for the stubbornly low employment gains in an environment where employers have millions of unfilled jobs. The world has plenty of armchair experts to do that. Needless to say, total employment in the US is still over 5.0 million less than pre-pandemic, and any thoughts that the FOMC would signal a taper at this month's meeting are now off the table. Add in the soft China data last week, which usually runs a few months ahead of the US, and the hawks are in retreat.

I would have expected a “buy-everything” sell US dollars frenzy on Friday. Instead, all we got was more of a whimper. The US dollar rose, but not markedly, gold rose, but not by much, cryptos rose because they're cryptos, and Wall Street equities ended up sort of sideways. Banks fell as US yields eased, which makes sense they make more money when rates are rising, and the yield curve steepens positively. That whimper may be due to the Wizards of Wall Street heading for the exit door right after the numbers for the long weekend. Today, US and Canadian markets are closed for Labour Day (sorry, Labor Day in rebellious English). So, a more genuine reaction may appear tomorrow.

Asia has opened in a circumspect manner this morning, with only the FOMO gnomes of Japan getting excited, propelling the Nikkei 225 higher as Friday's Suga rush persists. After softer heavyweight China and the US last week and a clampdown a day on the mainland, regional investors are hesitating to grasp the US Non-farms peace dividend, which has let basically every central bank in the Asia-Pacific off the US tapering hook. Waiting for the gnomes of Wall Street to return from their last long weekend of the summer probably isn't a bad strategy.

This week features a few heavyweight central bank policy decisions but not much in the way of tier-1 data globally. US JOLTS Job Openings should show employers screaming for warm bodies, while tomorrow's China trade data will be Asia's highlight. Asian investors, though, are likely to be more concerned about who is next in line for some “common prosperity” love. A soft exports number could cause a negative tremor to sweep Asia, although it will increase expectations that more central government stimulus is on the way. You can cut a bearish/bullish case for China equities both ways on a lower number.

The Reserve Bank of Australia announces its latest policy decision tomorrow. Rates will remain unchanged at 0.10%, but interest will be focused on whether it will roll back its tapering plans. That would be a positive for Australian equities, which are under the ex-dividend hammer today.

Bank Negara Malaysia will also leave rates unchanged at 1.75%, with its intentions to support the Covid-19 recovery already clearly telegraphed. With a Fed tapering now of the table until at least the end of the year, the ringgit could continue to rally as a potential carry trade candidate.

The week's highlight will be the European Central Bank policy decision. There will be no change of the lower forever interest rates, but recent Eurozone inflation data has had the Northern European hawks squawking loudly and hunting for doves. Noise has risen around tapering, but I believe the ECB will note the data from China, the Asian PMIs and the US Non-Farm Payrolls and clip the hawks' wings this time around. That shouldn't derail the Euro's rally, though, which is as much a weak US dollar story.

The US Non-Farms data has thoroughly derailed my Fed Q4 taper tantrum, Asian central bank nightmare, ASEAN underperformance outlook. I will ponder this over the next few days, especially once the US is back at work.

Improved risk sentiment post-NFP continues to support the Dax 30. The index is grinding the 30-day moving average as the bulls consolidate their gains near the record high.

16000 has become a key hurdle as high valuation makes buyers think twice before committing more chips. Though layers of support indicate an upward bias and may offer some peace of mind.

A bullish breakout would trigger an extended rally when momentum traders join the party. A fall below 15650 would prolong the sideways action to 15500.

Gold rose after lackluster nonfarm payrolls weighed on the US dollar. The precious metal has seen strong buying interest around the psychological level of 1800.

A bullish candle above 1832, the origin of the August sell-off would prompt sellers to reverse their bets, exacerbating the momentum in the process. Now that the major resistance withdrew, the bulls may have gained a free pass towards 1900.

As the RSI inches further into the overbought zone, 1811 is fresh support in case of a pullback.

The US dollar tumbled after a worse-than-expected jobs report.

The pound had held well above the former resistance level of 1.3780. The long side gained confidence while the short side gave up.

Sentiment will remain upbeat as long as the rising trendline is intact. A close above 1.3950 may propel the price to the psychological level of 1.4000, which lies within a supply area on the daily chart.

However, a repeatedly overbought RSI may trigger a pullback. 1.3820 would be the first support in that case.

The crude oil trend that started on Friday continues this morning. Weak US employment data - Nonfarm Payrolls in particular - put pressure on quotes at the end of the week. The published report pointed to a patchy economic recovery, which could mean a slowdown in fuel demand due to the onset of a new pandemic wave.

It should be noted that before the data release, oil updated monthly highs above $73.50 per barrel, and the subsequent decline was moderate. In general, by the end of the week, Brent added more than 1%.

However, on Monday morning, the price lost exactly this 1%, levelling off the gains and remaining under pressure. This time, the reason is no longer in the American labor market statistics. Over the weekend, the largest exporter, commodity giant Saudi Aramco (Saudi Arabia), said that in October, it would reduce the official selling prices for all grades of oil that enter Asia by at least $1. Such a move signals concerns about the volume of demand and that there are enough reserves in the world markets.

A Reuters poll among Asian refiners showed that the price drop of $1 per barrel significantly exceeded their expectations.

As a result, this morning, November Brent futures fell 90 cents, or 1.2%, to $71.71. October WTI futures fell 84 cents, or 1.2%, to $68.45.

Meanwhile, the US government is releasing oil from strategic reserves as production on the Gulf Coast is still pending due to Hurricane Ida. Access to 1.7 million barrels of oil and 1.99 billion cubic feet of natural gas is now blocked, according to a government report released on Friday. So far, the lack of electricity does not allow some stations to resume their work.

The hurricane also forced the US energy companies to cut their oil and gas rigs last week, and the number of oil rigs fell to lows since June 2020.

Markets

It wasn’t nearly the longed-for 733k net job gain, but August payrolls (235k & +134k net revision June/July) keep QE tapering announcement bets at the September 22 FOMC meeting alive. Details showed hiring in the pandemic-sensitive leisure & hospitality business and education services grinding to a halt. The unemployment rate fell to a cycle low of 5.2% (from 5.4%). The participation rate was unchanged (61.7%). Average weekly hours stabilized at 34.7 with average hourly earnings accelerating (0.6% M/M & 4.3% Y/Y). Fed Chair Powell has leeway to use the spreading Delta variant as a hedge to delay a decision or add a time lag between the announcement and the effective start, but could just as well feel comfort by the slight additional progress in August and give the thumbs up to slow net asset purchases. We remain adepts of the second scenario and feel supported by the market reaction. US Treasuries spiked higher in a first reaction, but eventually turned south even with the long US weekend ahead. US markets are closed today in observance of Labour Day. The US yield curve bear steepened with yields rising by up to 4.6 bps (30-yr). A breakdown shows that US real yields were responsible for the lion share of the move! Spill-over effects pulled German bunds lower as well, but US Treasuries obviously underperformed. German yields added 1 bp to 2.8 bps in a similar bear steepening move. The German 10-yr yield for a second time tested -0.35% resistance which is 38% retracement on the May/July yield decline. 10-yr yield spread changes vs Germany ended broadly unchanged.

The first reaction on the FX market – in line with the US T spike – was a weaker dollar. EUR/USD jumped towards 1.1909 resistance, but a break higher didn’t occur. Rising US yields gave a way out for the dollar as did a strong US services ISM (61.7 from 64.1 vs 61.6 expected). Details continued to show that supply-side troubles hamper an even faster economic recovery. They add to some Fed governors’ call that current stimulus is a medicine to support the demand side of the recovery and can therefore be dialed back. On the euro-side of the equation, this week’s ECB meeting called for some caution. Market positioning since end August changed from turning a blind eye to Europe/ECB to suddenly becoming aware that Frankfurt could slow weekly PEPP purchases because of higher growth & inflation forecasts and as financial conditions eased over Summer. A break north of EUR/USD 1.1909 will probably be tough ahead of Thursday’s gathering and especially given the extremely thin eco calendar.

News headlines

New Zealand’s prime minister Ardern lifted a nationwide lockdown today, moving the country back to Alert Level 2. Auckland, where the cluster of the delta variant was detected, remains on Alert Level 4 for at least one more week, she said. The strict measures have reduced new case numbers to just 20 after reaching a peak of more than 80 end of August. In neighboring country Australia, PM Morrison announced a plan to end pandemic lockdowns and state border closures by Christmas end of last week by doubling down on the vaccination strategy. There are doubts however that some Covid-free states, including Western Australia and Queensland, will open up to others that grapple with the country’s worst outbreaks (Victoria, New South Wales).

UK PM Johnson is due to return to parliament this week and is already facing a backlash from his own Tory party members. Johnson reportedly is planning a tax hike on British workers worth 10bn pounds to boost funding for social care. The Conservative Party said its breaks the 2019 manifesto and risks losing voters, particularly those in poorer regions who abandoned Labour for the Tories in that year. The UK Chancellor Sunak this week is also expected to announce ditching the “triple lock” pension guarantee, a governmental pledge to increase pensions by the highest of inflation, wages or 2.5%. The pandemic created distortions such that wages increased almost 9% over the past year.

Market movers today

• We start the week in a quiet fashion with US markets closed today due to Labor Day holiday.
• Markets will continue to digest weak US jobs report from Friday and its implications for the Fed's tapering plans (see more below). US Federal emergency unemployment benefits of USD300 per week and other aid will expire today, after about half of US states have already halted the payments earlier.
• In Denmark, data on bankruptcies and forced sales in August are due.
• Later this week, the key event for markets will be the ECB meeting on Thursday. US President Joe Biden will also likely decide whether to re-nominate Fed Chair Powell to a second term during this week.

The 60 second overview

Payrolls: US jobs data disappointed on Friday, with payrolls coming in at 235.000 for August. This was clearly an unwanted surprise for the US central bank which has been talking about tapering asset purchases at one of the upcoming meetings (e.g. in September). On the one hand, slower jobs growth could warrant a more accommodative approach. However, the case can also be made that jobs creation is nonetheless in the pipeline amid continued vaccination, that extraordinary measures which support income shortfall are set to expire (this week, in fact) and that surveys indicate high labour demand. As it is almost anybody's guess, which way the Fed will choose to interpret weak job creation, the impact on the dollar from expectations to future fed policy will be a coin toss in the near term. There is a real risk Fed may wish to sound a tad more dovish until jobs accelerate again but it may also choose to look through 'noise'.

ECB: The ECB meeting on Thursday next week is set to focus on the PEPP re-calibration and the inflation outlook. With stable and benign financial market conditions, record low real rates and an economy that is recovering well in Q3 as well, the conditions are met to slow the PEPP purchase pace but ECB will not call this tapering. See more in ECB Preview: Recalibrating, not tapering - but hawks will squawk (2. September).

The Big Picture: This morning we published our new updated global macro forecasts, see Big Picture: Delta delayed recovery (6 September). In the piece, we argue that the delta variant will continue to create headwinds for the global economy amid slow vaccination roll-out. Global macro momentum is set to ease further amid fading boost from stimulus and stalling re-opening of economies. The balance of risk to our growth outlook is to the downside, while supply side problems could lead to more persistent inflation problems stoking stagflation concerns.

Equities: Friday ended on a slightly weaker note, weighed down by the huge job miss. Tech and growth took the lead as markets discounted a dovish interpretation for Fed. Tech, communication services and health care were the winners for the day, while utilities, materials, industrials and financials sold off. S&P recouped the initial losses and ended unchanged, Nasdaq rose 0.2%, Russell 2000 -0.5% and Dow -0.2%. Buoyant setting in Asia this morning, with markets up 1-2% led by Japan. US markets will be closed for holiday and futures only see small movements.

FI: It was all about the US labour market report on Friday. A sharp US-led rally on the weaker than expected headline figure, was quickly reversed by the interpretation of stronger wage figures, leaving UST's 2.5bp higher for the rest of the day (around 1.32%). Core-EGB was mostly following US rates for most of the day. With the US labour market report essentially can be read with any individual bias, the signals from the FOMC members this week will be scrutinized for any tapering clues ahead of the FOMC meeting later this month (the silent period starts on Saturday). We also have the ECB meeting on Thursday, where the calibration of PEPP is widely expected to end up at a lower purchase pace. We expect EUR60/bn in Q4. Today US markets are closed due to Labor day, hence we expect a significant amount of 'sideways' trading. Later in the week, US President Joe Biden will also likely decide whether to re-nominate Fed Chair Powell to a second term during this week.

FX: EUR/USD temporarily touched 1.19 on Friday after the job growth in US disappointed. EUR/SEK dropped towards 10.15, while EUR/NOK rose to 10.30.

General trend

• Markets mixed with US holiday ahead, little new catalysts in the session so markets continue to trade off Friday news of weaker US payrolls and expectations that the taper timeline will be adjusted. China holds expo over the weekend saw various comments from PBOC, President Xi and Vice Premier. Markets move higher despite more regulation out of China.
• Currencies traded in a tight range with USD stronger against the majors.
• Yields across the region higher tracking US lead from Friday.
• Japanese market trade higher at the prospect of getting a new PM that would expand stimulus, after Suga unexpectedly stepped down Friday. Currently Defense Min Kono is seen as a favorite.
• China aluminum names traded higher on the news of a coup in Guinea (accounts for more than 50% of China’s imports of bauxite). LME rose to highest since May 2011.
• China Vice premier vows to support private companies.
• China PBOC annual financial system stability report noted that the financial risks in China have decreased and are generally controllable as regulatory measures take hold.
• US Department of energy updated on Louisiana refineries noting that 4 were starting to come back online. Shell noted that Norco was still without power.

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened 0.0%.
• (NZ) NEW ZEALAND Q2 VOLUME OF ALL BUILDINGS Q/Q: 2.0% V 2.9%E.
• OSH.AU Extends exclusive due diligence with Santos through Sept 13th.
• (AU) Australia sells A$1.0B v A$1.0B indicated in 1.25% May 2032 bonds, avg yield 1.322%, bid to cover 3.52x.
• SOL.AU Guides FY21 (A$) Net 316-328M v 170M y/y; Merger with Milton expect to occur in Oct.
• Looking Ahead: RBA rate decision tomorrow.

Japan

• Nikkei 225 opened +1.3%.
• (JP) Current Japan Foreign Min Kono said to be the favored in polls to replace Suga as LDP Leader – Press.
• 5991.JP Said to plan on increasing chip equipment part production – Press.

Korea

• Kospi opened -0.2%.
• (KR) South Korea company sales to China in 2020 -7% y/y, notes loss of market share – Yonhap.

China/Hong Kong

• Hang Seng opened -0.3%; Shanghai Composite opened 0.0%.
• (CN) China PBOC financial system stability report: Financial risks in China have decreased and are generally controllable as regulatory measures take hold – Xinhua.
• (CN) China Vice Premier Liu He: Policy to support private companies will not change, promises China will support private sector - Xinhua.
• (CN) China researcher: Sees room for cut to RRR or rate in H2 - China Securities Journal.
• CEO Dyukov confirmed plans to move away from the US dollar to the yuan in settlements in China, the latest move in trend that China and Russia are accelerating their de-dollarization push to enhance the security and convenience of China-Russia trade against potential unilateral US sanctions – press.
• (CN) Analysts note that foreign investors have added to their holdings of stocks in Shanghai and Shenzhen every month since Nov 2020, despite China regulatory moves – press.
• (HK) Expected that China Southbond bond link may reveal additional details during the week – Press.
• (CN) China PBOC Deputy Gov Chen Yulu: PBOC will close loopholes in its financial technology regulation, and include all types of financial institutions, services and products into its prudential supervision framework, will include all types of financial institutions, services and products into its prudential supervision framework - China International Finance Annual Forum in Beijing.
• (CN) China Securities regulator (CSRC) Vice Chairman Fang Xinghai: Will improve regulations for companies seeking overseas listings, and enhance channels for foreign investors to participate in China's onshore securities futures market - China International Finance Annual Forum in Beijing.
• 700.HK Analysts note that the release of its new game, League of Legends Mobile, is supposed to have a strong debut on Sept 15th.
• (CN) China PBOC sets Yuan reference rate: 6.4529 v 6.4577 prior.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY10B in 7-day reverse repos v CNY10B in 7-day reverse repos prior; Net drain CNY40B v Net drain CNY40B prior.

Other

• (AU) UN Assistant Sec Gen Hart will put pressure on OECD countries, including Australia, to shut coal industries, noting timeline allows for a transition of coal workers - leaked speech notes for Crawford Leadership Forum.
• (TW) Taiwan scrambled jets Sunday in response to China military activity in its air space - press.

North America

• US and Canada markets closed for Labor Day holiday.
• DIDI Denies report about investment or takeover by China state owned firm.
• (US) US Dept of Energy: 4 oil refineries in Louisiana have initiated restart processes after Hurricane Ida, 5 still have yet to resume operations.

US Markets Friday

• (US) AUG CHANGE IN NONFARM PAYROLLS: +235K V +725KE (below lower-end of analyst expectations).

Europe

• (UK) National Health Services has received additional £5.5B to help with COVID recovery - UK press citing sources in Govt.
• (UK) PM Johnson thought to be looking to push through a tax increase, in order to fund social care; no opposition expected - UK press.
• (UK) According to CBI, UK is facing 2 years of labor shortages, it will not be helped by Govt job retention scheme, no quick fix for training skilled staff - UK press.
• (EU) EU Economic Commissioner Gentiloni (Italy):Watching EU inflation, we should monitor very accurately, but avoid making conclusions too early, the mainstream consensus is on the fact that this inflation is still a temporary phenomenon - press citing Ambrosetti Forum.

Levels as of 01:00ET

• Hang Seng +0.3%; Shanghai Composite +1.0%; Kospi -0.3%; Nikkei225 +1.8%; ASX 200 -0.4%.
• Equity Futures: S&P500 -0.0%; Nasdaq100 +0.1%, Dax +0.0%; FTSE100 +0.0%.
• EUR 1.1887-1.1865; JPY 109.85-109.71; AUD 0.7462-0.7429; NZD 0.7164-0.7136.
• Commodity Futures: Gold -0.3% at $1,828/oz; Crude Oil -1.1% at $68.53/brl; Copper -0.6% at $4.31/lb.

Daily Pivots: (S1) 1.1860; (P) 1.1884; (R1) 1.1903; More...

Intraday bias in EUR/USD remains mildly on the upside with focus on 1.1907 resistance. Decisive break there will indicate that fall from 1.2265, as well as the consolidation pattern from 1.2348, have completed. Near term outlook will be turned bullish for 1.2265/2348 resistance zone. However, on the downside, rejection by 1.1907 followed by break of 1.1792 support will dampen the bullish case, and turn bias back to the downside for 1.1663 support instead.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally remains in favors long as 1.1602 support holds, to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289 and below.

Daily Pivots: (S1) 1.3821; (P) 1.3856; (R1) 1.3895; More...

Intraday bias in GBP/USD remains on the upside at this point. Rise from 1.3601 should target 1.3982 resistance first. Decisive break there will l indicate that fall from 1.4248 has completed. Near term outlook will be turned bullish for retesting 1.4248. However, on the downside, break of 1.3730 support will bring retest of 1.3570/3601 support zone instead.

In the bigger picture, as long as 1.3482 resistance turned support holds, we'd still treat price actions from 1.4248 as a corrective move. That is, up trend from 1.1409 (2020 low) is in favor to resume. Decisive break of 1.4376 key resistance (2018 high) would indeed carry long term bullish implications. However, sustained break of 1.3482 will at least bring deeper fall to 38.2% retracement of 1.1409 to 1.4248 at 1.3164, or even further to 61.8% retracement at 1.2493.