A Goldilocks payroll report on Friday failed to support risk assets, with stocks and the dollar rapidly reversing on news that Russia was not restarting gas flows through the Nord Stream pipeline.
Preview Goldilocks and the Bear
• Goldilocks payroll overshadowed by Nord Stream shutdown
• Stocks closed in the red on Friday and the USD was little moved
• US yields fall first on both payroll and Nord Stream headlines
• China lockdown expands, Shenzhen joins Chengdu in lockdown
• Upcoming: AU Inventories, Caixin Services PMI, US Labor Day
• This week: RBA and Lowe’s, AU Q2 GDP, ECB, BoC, Fed’s Powell
A Goldilocks payrolls report failed to support risky assets on Friday, with stocks and the dollar rapidly reversing on news that Russia was not restarting gas flows through the Nord Stream pipeline (no date no resume was given). The S&P500 which was up 1.3% after payrolls, fell sharply into the red to close down -1.1%. A similar story was seen for the USD which fell -0.6% on the post DXY payrolls, recovering to end broadly unchanged (DXY -0.1%). Yields which fell sharply after the payroll, withstood sharp declines in Nord Stream headlines with the US 2-year yield down -11.9 basis points to 3.39%. The 2/10s curve steepened to -21bps with the 10yr yield -6.4bps at 3.19%. Underscoring the geopolitical angst, gold rose 1.0% to 1,712 despite the USD being little changed during the day. Note that European spot markets were closed when Nord Stream headlines hit the headlines – EuroStoxx futures point to -2.5% when trading resumes tonight. Except that wholesale gas and electricity prices will also rise. Besides European gas, the other target is the rate hikes expected by the RBA, the ECB and the BoC.
First, the Goldilocks payroll report with payrolls broadly in line, but unemployment and wages weaker than expected . Overall payrolls were 315,000 against the consensus of 298,000, while the previous two months were revised down by a combined total of 107,000. Unemployment rose two ticks to 3.7% from 3, 5% (3.5% expected) alongside an increase in turnout to 62.4% from 62.1%. Average hourly earnings also grew at a more moderate pace with average hourly earnings up 0.3% m/m vs. 0.4% expected and down from 0.5%. On a 12-month basis, wage growth was still a hot 5.2%, but that was also a bit below estimates. The increase in the partial rate and the weakening of average hourly earnings may be a tentative sign that the intense tensions in the labor market are starting to ease slightly and alleviate some of the fears stemming from other indicators such as job offers. use. Markets interpreted the release as a diminished chance of a 75 basis point hike at the September 21 FOMC, now priced at 55% from around 75%. Meanwhile, the expected peak in the federal funds rate also fell back to 3.83% from 3.95%. Next week’s CPI figures will also be key to whether it is 50 or 75 on September 21.
The suspension of gas flows from Russia via Nord Stream completely negated the positive risk tones that emanated from the Goldilocks payroll report. Gazprom has officially stated that it has extended the shutdown of the Nord Stream pipeline, citing a leak, and that the pipeline will not restart until repairs are fully implemented with no reopening date given (note that it was due reopen on Saturday September 3). The pipeline was operating at 20% capacity and the lack of flow will continue to test Europe. The decision to halt gas flows was seen by some analysts as retaliation for the G7’s plan to cap Russian oil prices, with such a cap expected to be ready before early December. Russia has already said it will not sell oil to countries that agree to the plan, and for any plan to work, non-G7 nations would have to agree as well. China and India have increased their imports of Russian oil in recent months. OPEC+ also meets tonight, with no changes expected in terms of production targets. Brent crude rose 0.7% to $93.02.
Europe faces an even more dire energy outlook and a few countries have announced fiscal plans. Over the weekend, Germany announced a €65 billion (~2%/GDP) support package for businesses and consumers. Meanwhile, Sweden and Finland have announced liquidity and credit guarantee measures for power companies, many of which are struggling to provide collateral in the form of margin on derivative contracts. The most concerning impact at the moment comes from the industrial sector, with many anecdotes of companies reducing production. ArcelorMittal announced this weekend that it was closing two of its factories in Germany in light of soaring energy costs. How monetary policy should react to this is less clear, although the ECB will no doubt decide to raise rates this week. According to the latest Reuters poll, 30 of 61 respondents expect the ECB to announce a whopping 75 basis point hike, 27 expect a 50 basis point hike – while four expect a increase of 25 basis points.
In the FX market, the currencies played up with the USD (DXY) initially falling 0.6% but reversing completely on the Russian headlines. On the net, the main moves were: EUR -0.1% to 0.9924; GBP -0.5% to 1.1476 and USD/KPY +0.1% to 140.13. AUD (+0.0% to 0.6777) and NZD (+0.5% to 0.6095) held up better. Elsewhere, the PBOC pegged its daily yuan correction higher than expected for the eighth day in a row, helping USD/CNY stabilize around the 6.90 mark on Friday. In the upcoming session, the focus will be on the EUR and GBP given the gas headlines, and as the new UK Prime Minister addresses the country and unveils the UK’s response to the energy crisis.
Finally, there’s more news on lockdowns in China, with most of Shenzhen in lockdown over the weekend and kicking off mass. According to Caixin news, there are now 65 million people under full/partial lockdown in 33 cities across China, while other cities are tightening restrictions ahead of the Chinese Party Congress on October 16, where President Xi is expected to be Elected to historic third, 5-year term. Following this, it is unclear if China will start to move away from its zero COVID policy. As long as the policy exists, stimulus measures are unlikely to gain traction, at a difficult time for China’s property market and the broader economy.
Coming this week:
Australia: All eyes are on the RBA with two key events that could shape expectations. The RBA is expected to hike rates by 50 basis points on Tuesday (21 of 23 economists surveyed) and Governor Lowe is delivering his annual Anika Foundation address on Thursday, titled “Inflation and the Monetary Policy Framework.” All the focus will be on the outlook and on whether the language supports a 25 basis point cut in increases after September, and what exactly the Governor’s “same keel” comments mean in regards to concerns the return of inflation to 2-3%, against an uncertain growth outlook. Also, this week, Q2 GDP numbers are Wednesday and NAB pencils up 0.7% q/q, below consensus of 1.0%. Analysts will likely update their forecasts after the pre-GDP partials earlier in the week with inventories on Monday and net exports on Tuesday. The GDP salary indicators will also be closely watched and they should be much hotter than the WPI given that they include hours and bonuses.
• United States: a quiet start with markets closed for Labor Day on Monday. The focus will then shift to the services ISM on Tuesday, followed by Fed Chairman Powell on Thursday, who will speak in a moderated monetary policy discussion hosted by the Cato Institute. It’s unclear how much more Powell can add in terms of warmongering given his address in Jackson Hole. As for the services ISM, it will be closely watched given that the S&P Services PMI has been in contraction territory for two consecutive months (currently 44.1), with consensus for the much stronger ISM at 55.2. against 56.7. The Fed’s Beige Book is also on the calendar, and the Fed’s Brainard is also talking about monetary policy. North of the border, the Bank of Canada meets on Wednesday and where a 75bp hike to 3.25% is expected.
• CH: A big week of data that will likely be overshadowed by China’s ongoing zero COVID policy with Chengdu in lockdown and other cities tightening restrictions ahead of the party congress on October 16, where President Xi is expected to be elected to a historic position. third five-year term. The Trade Balance is on Wednesday, the CPI/PPI on Friday and the Global Finance numbers are due Friday through the following week. The trade balance is the stat to watch given slowing global growth and domestic demand uncertainty given real estate headwinds, drought impacts and China’s ongoing zero-COVID policy .
• EZ/UK: fallout from the indefinite closure of Nord Stream in the foreground, then ECB meeting on Thursday. Markets are poised to fully price a 75bp upside after many ECB officials said they were leaning in that direction, although there is still likely some debate around 50 vs. 75. The outlook from the ECB will also be important given that activity so far has withstood intense pressure from energy prices and inflation in general. Across the Channel, Britain’s new Prime Minister is announced on Monday and then focuses on his response to the cost of living crisis. BoE Governor Bailey speaks on Wednesday.
• AU: Inventories/Earnings, Jobs, Inflation Gauge: Big day for the data, but all are mostly second tier and unlikely to influence the market. Pre-GDP partials for stocks and earnings came out with consensus at 1.5% q/q and 4.5% respectively. Perhaps more interesting is the unofficial monthly inflation gauge for August, which can give an indication of the extent of inflationary pressures in August. ANZ job vacancies are also out.
• NZ: Building volume: Market unlikely to move, consensus is 1.0% q/q.
• CH: Caixin Services PMI: consensus is for a fall to 540.0 vs. 55.5.
• EZ: Final Services PMI, Retail Sales: Retail sales are expected to rise 0.4% m/m, while the Final Services PMI should be identical to the preliminary estimate of 50.2.
• United Kingdom: Liz Truss should be confirmed as British Prime Minister this evening; Market nervousness over Truss’ policy mix is evident in GBP and UK gilt selling
• United States: Labor Day: markets are closed.