Friday, February 7, 2020

China to halve tariffs on US goods; will NonFarm payrolls beat estimates?

Tags
  • China
  • Dollar
  • Euro
  • Stocks
  • NonFarm Payrolls
  • US earnings' season

Market Recap: Wall Street continues its winning streak on Thursday

Wall Street continued to advance on Thursday as China steps up measures to boost investor sentiment. China's said on Thursday that it will cut tariffs by half on US$75bn worth of US imports starting from February 14th as part of the phase one deal between the two. Beijing's announcement helped to lift stocks around the globe, pushing Asian stocks higher on Thursday and in turn helped stocks in the US extend its rally for one more day.

In company news, Twitter shares soared 15.03% to US$38.41 per share after its quarterly revenue and daily active user base beat estimates (Revenue: US$1.1bn (A) vs US$994.5mn (E); Daily Active users: 152mn (A) vs 148.1mn (E)).

Kellogg shares dived 8.51%, to US$63.46 per share after its weak outlook to 2020. The company beat EPS and revenue estimates for its latest quarter (EPS: US$0.91 (A) vs US$0.86 (E); Revenue: US$3.22bn (A) vs US$3.18bn (E)) but fell short of earnings forecast after it said that it expected EPS to fall as much as 4% this year.

Uber reported quarterly figures that were mostly in line with estimates (Gross bookings: US$18.13bn (A) vs US$ 18.03bn (E); EPS: US$-0.64 (A) vs US$-0.65 (E); Uber Eats bookings: US$4.37bn (A), US$4.21bn (E)). Its shares were 6.23% higher in after-hours trading as of 8.51am (GMT +8) after the company revealed its target to be profitable in the fourth quarter of 2020.

The dollar gained against major currencies after initial jobless claims beat economists' estimates, growing only 202,000 the last week instead of the expected 215,000. The euro retreated after Germany’s factory orders in December largely missed economists’ forecasts, declining 2.1% MoM instead of a 0.6% growth.

Gold continued to advance while the yen weakened against the dollar on Thursday. Investors continues to use gold as a hedge against an extended rally in the equities market. US Treasuries were mostly higher, with Benchmark 10-year yields losing 0.9bp to 1.64%.

Oil futures were mixed on Thursday as OPEC+ members are still unable to agree on a solution to curb a dive in crude oil prices as a result of the coronavirus outbreak in China.

Asian equity markets started Friday’s trading session mixed, signalling a possible correction in prices. Later in the trading session, most Asian indices were lower as investors are likely to be cautious as a result of a three-day rally in Asia even as the coronavirus outbreak continues to spread at an accelerated rate. The death toll and confirmed cases of the outbreak reached 636 and 31,161 respectively in China on Friday morning.

Important economic releases for the day ahead include Canada’s unemployment rate for January at 5.30pm (GMT +4) and the US’ labour market report from the Bureau of Labour Statistics (BLS) at 5.30pm (GMT +4) as well.

Today’s Analysis: Jobs in US looks set to expand more than economists’ consensus

Better-than-expected Purchasing Managers' Index (PMI) reports from the Institute for Supply Management (ISM) may be a possible signal that today’s jobs report from BLS may surprise the market. Manufacturing PMI unexpectedly jumped to 50.9 on Monday, besting economists' consensus of 48.5 and recovering from December's level of 47.2. The report also mentioned that overall sentiment in January is moderately positive for short-term growth. Coupled with net positive new orders and net positive production, employment is also likely to pick up in the manufacturing sector in the US.

Non-manufacturing PMI for January increased 0.5 points from December to 55.5, beating economists' estimates for 55.1. New orders rose in January (56.2 vs 55.3 prior) to exactly the six-month average figure for the sector. Business activity continued to grow faster in January (60.9 vs 57.0 prior), signalling that business sentiment in the sector continues to improve. Employment in the non-manufacturing sectors did grow at a slower rate than December however, implying that today's employment report may show some signs of slower growth as well. But correlation between change in NonFarm payrolls and ISM’s non-manufacturing employment index has started to reverse to negative, implying that it may not be a strong signal that today’s employment report will disappoint.

Automatic Data Processing’s (ADP) employment report contradicts the ISM's non-manufacturing PMI report's employment index however, with private payrolls surging to 291,000 in January from 202,000 in December, besting the consensus of 157,000. While ADP's employment report is usually not indicative of the BLS' employment report, the increase from December may be a directional indication that BLS' change in NonFarm payrolls may increase from December as well, which is in line with economists' forecasts.

The four-week moving average initial jobless claims' downtrend in January signals that the US labour market is likely to remain strong. The sharp decline from the four-week moving average at the end of December 2019 to end of January 2020 signals that Change in NonFarm Payrolls in December is likely to improve as well.

There should be some upside potential to the dollar at today's release of employment data by the BLS as a result. Bloomberg's survey of economists' median forecast for change in NonFarm payrolls to grow by 165,000 of roughly implies that financial markets are already pricing in an increase in jobs in January. But we forecast payrolls to rise by roughly 180,000, which may result in a potential upside of approximately 0.12% for the greenback against the euro.

If NonFarm payrolls increases over economists' forecasts as expected, EUR/USD is likely to fall past 1.0974's level to 1.0969's level, i.e. a 0.12% fall in prices. Expect the currency pair to range between 1.0941 to 1.0974 after the announcement as prices start to stabilise.

Technical Analysis:

EUR/USD

Bears are in possession of the EUR/USD pair and will likely continue to apply pressure on the currency pair ahead of today’s employment report in the US. With strong economic data in the US earlier in the week, EUR/USD has shifted back towards the oversold level of RSI, indicating that a possible trend reversal might be approaching. This means that EUR/USD has a larger upside potential if today’s employment report misses forecasts, possibly rising towards 1.1001’s level. But we expect jobs in the US to grow more-than-expected in January which should give bears the momentum to hit the 23.6% Fibonacci retracement level of 1.0969 and range between 1.0941 and 1.0974 after.

Support: 1.0974 / 1.0960 / 1.0941

Resistance: 1.0992 / 1.1001 / 1.1022

 

EUR/USD Chart(H4)