Markets Today: Workin’ 9 to 5

298,000 more of them were doing just that last month according to ADP.

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This number, that is an amalgam of historical trends, other macroeconomic indicators (such as weekly jobless claims) as well as ADP’s own payroll processing data, is often a less than reliable guide to the official payrolls figures. It is nevertheless seeing economists lift their forecasts for tomorrow’s number.

The consensus heading into ADP was for a gain of around 200,000. Chances are the median NFP forecast will move up to at least 225,000 but with the ‘whisper number’ for tomorrow likely to be closer to 250,000.  In truth, we‘ll be more interested in the earnings component of the report, though it’s hard to see even a below-expectations number here derailing a Fed hike next Wednesday. We and the market are already focussed on what the new ‘dot plots’ will reveal and therefore how comfortable the Fed now feels about its prior guidance that rates will likely rise three time this year and by the same again next year.

Thank goodness for the strong ADP number, otherwise this column would be extremely hard to fill.  As it is, this one data points sufficed to push US bond yields back up, to 2.58% at 10 years and 2.11% at 5 years, their highest levels since mid-December and so challenging the range highs in place since last November.  An afternoon pull-back looks to owe something to sharply lower oil prices (by around 5% or nearly $3).  Here, comments from the Saudi oil minister have played a part, suggesting that Saudi Arabia would not bear the brunt of OPEC/non-OPEC supply reductions indefinitely and that ultimately intervention was futile. The absence to date of any big drop in inventories, alongside raised production estimated this week by the EIA for US crude production  both this year and next, are also weighing.

In currencies, what’s noticeable is that the four commodity linked G10 currencies – AUD, NZD, CAD and NOK, sit at the bottom of the 24-hour league table, with AUD/USD – currently 0.7534 – the lowest since January 30th.  It does appear that the typical negative correlation between the US dollar and commodity prices –  interrupted in the immediate aftermath of Trump’s election win and where commodities received a fillip from the romantic thoughts about massive US infrastructure spending – is reasserting.  This in turn means that commodity-linked currencies are flipping from outperformers on the crosses in late 2016 to underperformers now (and after the NZD had earlier led the way aided in part by lower dairy prices).

Coming Up

The Australian calendar is blank today.

The main event internationally is the ECB meeting, the backdrop to which is the recent sharp pick-up in inflation in the Eurozone in aggregate and Germany in particular.  Previously, ECB President Mario Draghi had said that the recent pick up in headline inflation reflected base effects from year-ago oil price weakness and was unlikely to be sustained (and he could support his view with the fact EZ HICP is still running sub-1%).  In contrast, the rise in German inflation to above 2% has prompted various outpourings of angst from German officials who believe that the ECB should start to signal its preparedness to start winding back on its super accommodative monetary policy sooner rather than later. Several politicians have publicly lamented that negative interest rates were killing German savers and are politically very unpopular.

Our view here is that it is premature to think Mr Draghi will signal that the end is nigh for its QE policy and -0.4% deposit rate and that the ECB needs to keep the pedal to the metal to ensure too-low inflation/inflation expectations are expunged once and for all. That said, there are question marks over how the ECB will deal with collateral shortages in order to accomplish its current €80bn per month QE buying programmer – reducing to €60bn per month from April through year-end – without adding further downward pressure to rates. We will also getting new ECB forecasts and where the extent of any upgrading of CPI forecasts may be more telling than what is likely to be a still-dovish Draghi at the post-meeting press conference.

The Euro seems bound to display some fresh volatility out of the ECB, and which has been one of the better performing major currencies on the back of the inflation pick-up and what that potentially means for the ECB, alongside some diminution of perceived risks of Marine Le Pen becoming the next President of France.

The only data point to note tonight will be weekly US jobless claims, last week at their lowest level since 1973.

Overnight

On global stock markets, the S&P 500 was -0.01%. Bond markets saw US 10-years +3.19bp to 2.55%. In commodities, Brent crude oil -4.74% to $53.27, gold-0.7% to $1,208, iron ore -2.9% to $87.19, steam coal -0.8% to $78.65, met.coal +0.0% to $162.75. AUD is 0.7533, the range since yesterday 5pm Sydney time 0.7532 to 0.7609.

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