Friday, November 1, 2019

US consumer spending data falls short of expectations; all eyes on US NonFarm Payrolls and PMI figures?

  • Dollar
  • Gold
  • Euro
  • NonFarm Payrolls
  • Oil

Market recap: Bloomberg report casts doubt on US-China trade pact

Bloomberg reported on Thursday that Chinese officials have doubts about whether it is possible to reach a comprehensive long-term trade deal with the US, even as both superpowers are said to be reaching a “phase one” agreement. The report casted more doubt on the US-China trade war after Chilean President Sebastian Pinera announced on Wednesday that the country is cancelling this month’s Asia-Pacific Economic Cooperation (where US President Donald Trump and China counterpart Xi Jinping were expected to meet to sign the first phase of the trade pact) due to violent protests. The DJIA fell 0.52%, the S&P 500 lost 0.30% and the Nasdaq retreated by 0.14%.

US consumer spending fell short of expectations for September, increasing only 0.2% month-on-month instead of economists’ forecast of 0.3%. Core Personal Consumption Expenditure (PCE), an inflationary measure used by the Fed, met expectations, increasing 1.7% year-on-year. Fed Fund futures indicated that implied probabilities for a future rate cut in April rose to 67.9% as a result. The Dollar Index fell after the data was released, closing Thursday 0.30% lower.

Safe haven assets surged as investor optimism regarding the US-China trade war faded. Gold spiked 1.16%, closing Thursday at 1512.99. The yen strengthened against the greenback by 0.75%. US Treasuries continued to move upwards for the third session - two-year yields gained 7bps to 1.52% and 10-year yields rose 8bps to 1.69%.

Asian stocks tracked Wall Street’s losses, with the Nikkei, Hang Seng Index and Straits Times Index starting Friday’s trading session 0.86%, 0.37% and 0.07% lower respectively. In Japan, the Bank of Japan (BoJ) kept monetary policy unchanged on Thursday. But the central bank said that it expects interest rates to remain at current levels or lower, in order to achieve its 2% inflation rate target. The change in forward guidance likely stems from the unwillingness to cut its rates lower than -0.1% and to attempt to keep the yen from strengthening against other currencies.

Today’s analysis: How will General Motors’ strike affect October’s NonFarm Payrolls?

Markets will be focused on US economic data releases today. The US Bureau of Labor Statistics’ (BLS) Change in NonFarm Payrolls for October is set to be released at 4.30pm (GMT +4), while the Institute Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) for October will be released at 6pm (GMT +4).

Economists expect an 85,000 increase in NonFarm Payrolls for October, a drop from an 136,000 increase in September. The expected slump in job growth is likely an estimate of the impact the strike at General Motors Co. will have on the dataset. The US BLS reported that roughly 46,000 employees downed tools. But the drag on the labour market could be more than the reported figures due to possible ripple effects of the strike.

October’s Automatic Data Processing (ADP) Employment Change, released October 30th, showed an employment growth of 125,000 in the private sector, beating the consensus of 120,000. But ADP Employment Change data counts workers on strike as on payroll, while the US BLS Change in NonFarm Payrolls does not. In addition, both Continuing and Initial Jobless claims have been mixed through the month of October. NonFarm Payrolls for October may possibly miss expectations, as the impact of the General Motors strike may be bigger than expected.

ISM Manufacturing PMI is expected by economists to continue its contraction, but rise from September’s figure of 47.8 to 48.9 in October (a PMI lower than 50 indicates a contraction in the sector while 50 and above indicates an expansion). We expect the US manufacturing sector to continue to contract as expected, as companies hold back on investments and employment due to the global trade slowdown and to hedge risk against volatile US-China relations. But as the US and China trade war mostly posted positive developments over the month of October, the data may possibly outperform expectations.

As we expect the employment market to soften and the manufacturing sector to continue to contract but possibly beat expectations, the dollar is likely to weaken. EUR/USD may as a result strengthen past 1.117’s levels to range between 1.117 and 1.121.

But if the employment data beats expectations, then expect the EUR/USD to fall to 1.112’s levels as the greenback strengthens.

*Source: ADSS

*Source:ADSS, TradingView

EUR/USD bulls have possession of the currency pair and will likely continue to apply upward pressure on bears by trying to retest the 1.117 resistance line. If either US employment data or manufacturing PMI disappoints, expect the bulls to break 1.117 and apply upward pressure on the bears to break the second resistance level at 1.121.