US NFP expected a 220K

The Day So Far

Mildly bearish action seen in equity markets this morning, with the Dax making a sharp break below the 11200 level (the May low) before retracing on light volume and perhaps a lack of conviction from investors ahead of the afternoon’s key risk events. German Factory Orders, released this morning at 7am , continued to point towards real economic recovery in the Euro area ‘powerhouse’ and encouraging the euro to push just shy of the 1.13 handle before retracing. There was also further good news for the German economy with the Bundesbank upgrading their GDP growth forecasts for this year, up to 1.7% from a measly 1% in December.

Elsewhere, crude continued to tumble ahead of the OPEC press conference today at 15:00 BST, hitting $57.25 a barrel and heading for its biggest weekly loss for three months. On the Greek front, there were two interesting developments to note; firstly, the Greek Government has decided to defer its EUR300m payment to the IMF; and Tsipras is to speak with Russian President Putin as he examines his options if the worst comes to the worst and he leads his country out of the monetary union. Overnight Chinese stocks continued to power ahead, with the Shanghai Composite gaining 1.5% to top the 5,000 market for the first time since early 2008.

The Afternoon View

Investors’ focus for today, absent any further adverse Greece headlines, is likely to be fixed firmly on Non-Farm Payrolls to be released as usual at 13:30 BST. The ADP Employment report of 201k on Wednesday showed another month of robust jobs gains in the US, and expectations for the headline number today are set at 220k , pretty much inline with the previous month and, if confirmed, will make it 15 out of 16 month of 200k+ jobs growth in the US. So we know that job creation isn’t at issue in the US labour market, but quality is more important at this stage, and the lack of wage growth has led the Federal Reserve to maintain their cautious outlook regarding a rate hike. The weak wage growth provides cover for Chair Yellen’s ongoing dovish stance, so look out for the average hourly earnings M/M so drive the market reaction, even if the headline number is strong, the devil will be in the detail. In terms of trading opportunities, we are looking for the cleanest trade to be in T notes, which have been looking vulnerable all week to a sell off and this event, even if only a mediocre set of data is likely to cause a change in the Fed’s outlook regarding rate hikes this year. Only a number comfortably below 200k , combined with weaker wage growth, would give the Fed cause to change course and for investors to perhaps start to shift the consensus on the first rate hike from September to December. With that in mind, and in the light of the mixed US economic data recently, the IMF yesterday cut their US GDP growth forecasts for this year from 3.1% to 2.5% and called on the Fed to further delay their first rate hike for fear of choking off economic growth.

The other main event for today is the conclusion of the semi-annual OPEC meeting , with the resulting press conference due at 15:00 BST to be held by OPEC Secretary General El-Badri. Expectations are for no change in production, despite the clear split emerging within the cartel , with Saudi Arabia keen on maintaining or even increasing current production tin order to capture market share from the US Shale producers, among others; and the likes of Venezuela and Libya who need a higher price to breakeven on their respective budgets for this year. WTI has traded weaker in recent days, and a refusal to cut production could lead to further profit-taking in the commodity, particularly after the strong rally seen in recent months.