BoJ resists calls for more monetary easing

The Day So Far

The inevitable pre-NFP lull this morning, the ‘calm before the storm’ on what is being billed as the most important employment report this year. Trading thus far has been understandably circumspect, the S&P remaining on the back foot following the considerable selloff last night. Yesterday represented the last opportunity for investors to unload their equity positions in the cash markets before the pre-market NFP announcement, so the strong sell-off makes sense in that context. WTI crude bounced very nicely off the 13th January low of $44.275, climbing above $45 before retracing. We are at such low levels now, perhaps another burst of dollar strength can lead a final bear plunge towards $40 but crude has closed just twice below these levels all year so prepare for a decent rebound. We just need a catalyst, with maybe a miss on today’s NFP enough for a sustainable bounce on the resulting dollar weakness. We shall see.

The Afternoon View

This afternoon is all about the US labour market. Why is today’s Nonfarm Payrolls so crucial? The FOMC caused much confusion in the minutes released following the previous meeting, suggesting that ‘some’ improvement was needed to the labour market as a pre-condition for the first rate hike since 2006, and today is one of just two NFP releases before the September meeting. The slim pickings in terms of economic data points places added significance on this release, with a headline number of 225k expected, a minimal increase on June’s 223k. Does this represent the ‘some’ improvement the Fed are looking for? Perhaps, perhaps not, bearing in mind that the US economy has added an average 200k+ over the past 18 months, so unless the headline number is massively above or below expectations I would expect average hourly earnings to take greater significance, On that note, it was telling that the ECI (Employment Cost Index) released last week delivered the smallest increase in 33 years, suggesting that the wage growth necessary to drive core inflation higher just isn’t there and so the Fed has cover to refrain from hiking at the next meeting. Our view is that the FOMC, the context of the macro economic challenges currently in the shape of China and the disinflationary impact of lower crude prices, cannot possibly raise rates at this juncture and the real pressure to hike may come later in Q4 if/ when crude recovers and inflation heads northward of 2% with the Fed behind the curve. For this afternoon, we expect a solid beat of the market expectations but without the wage growth to match, which is probably enough for investors, who view a September hike as 50/50, to fret about an upcoming hike. Therefore, we are looking for dollar strength, and for crude to re-test yesterday’s low, T notes to sell off and the S&P to come under renewed pressure as the bears come out of the woodwork to proclaim the top is in for US equities on the back of tepid earnings growth this year and the Fed beginning to tighten monetary policy. Please note the considerable uncertainty inherent on releases such as these, and a weak report would cause us to revise our biases and our strategy entries.