Market Overview
The spike higher on Treasury yields in recent sessions has the ability to really negatively impact on market sentiment if the move continues apace. The 10 year Treasury yield has now jumped by 15 basis points since the huge surge took off on Wednesday’s strong employment and ISM data. This turns focus squarely on today’s Non-farm Payrolls. All signs are that the US economy is firing on all cylinders now. Growth of 4.2% in Q2 seems to have run at similar levels in Q3 according to the Atlanta Fed’s GDPNow model. Survey data in the services sector from the ISM was at record levels and FOMC Powell is implying there is plenty of scope for further rate hikes.
With the 10-Year yield at 7 year highs there seemed to be a notable shift on bond markets this week, conceding that inflation and growth expectations need to be re-assessed. If this is now backed by strong growth numbers in the Non-farm Payrolls and strong earnings growth (which is still the final piece in the jigsaw on rising inflation expectations), then expect to see yields find traction higher again.
The dollar saw perhaps a surprising unwind yesterday, but this leaves several dollar major pairs at crucial levels. If we see a strong payrolls report today, this will simply be a pullback that gives the dollar bulls another opportunity. The flip-side of that is that this spike in yields is negative for market sentiment and risk appetite, as seen on the selling pressure on Wall Street last night. Further moves higher at the pace we see currently, and the selling pressure through equities could accelerate.
Wall Street closed strongly lower yesterday with the S&P 500 -0.8% at 2901, although futures have steadied a touch today there was still selling pressure through Asian markets (Nikkei -0.7%). European indices are mixed in early moves with an eye on Non-farm Payrolls later.
In forex, there is the usual consolidation forming ahead of payrolls, however, it is interesting to see that sterling is a mild outperformer following yesterday’s strong recovery.
In commodities, gold and silver are consolidating whilst oil has found some support after a considerable corrective move yesterday.
The big focus for traders will be the payrolls report. After months where the market has paid little attention to a stream of jobs reports that have done little to change the outlook, this report could be a little bit more interesting. Strong ADP jobs numbers and a strong employment position in a 21 year high ISM Non-Manufacturing release has heightened expectations.
The US Employment Situation is at 13:30 BST with the headline Non-farm Payrolls expected to be 185,000 which is a number there to be beaten now. The Average Hourly Earnings are expected to grow by +0.3% on the month however, this would be a slip back to +2.8% for the year on year data (from +2.9% last month after a strong month on month growth in August of +0.4%). Also there is an increasing interest in how Unemployment moves, and it is expected to drop further to 3.8% (from 3.9% last month) and towards the Fed’s projected 3.6% in 2018. U6 Underemployment fell to 7.4% which was positive last month but the labour force participation rate also dropped back to 62.7% and if the US labor market is so strong, a failure for this to pick up will pose some questions, so both will be worth keeping an eye on.
Other than the payrolls report, there is also the US International Trade Balance for August at 13:30 BST which is expected to deteriorate to -$53.5bn (from -$50.1n in July).
Chart of the Day – AUD/JPY
The Aussie has come under considerable strain in recent sessions with the risk negative implications of spiking bond yields. This is reflected in a series of sell signals on Aussie/Yen which is a pair that is a good reflection of market risk appetite. This comes with the near term break below support at 81.30 on three strong bear candles. The market is now putting increasing pressure on the old key floor of 80.50 which has become a pivot in recent months. A close below 80.50 would confirm a decisive deterioration in the outlook, opening initial support at 79.80 but realistically a retreat back to the 78.70 low could easily be seen. The momentum indicators are taking on an increasingly negative configuration with the Stochastics confirming a near term sell signal, the MACD lines posting a bear cross and the RSI accelerating below 50. The RSI also has downside potential as recent bear legs have all taken the RSI back to 30. Initial resistance is at today’s high of 80.75 but the breakdown at 81.30 is now overhead supply and rallies are increasingly a chance to sell.
After the breakdown below $1.1500 on Wednesday, yesterday’s pullback leaves the market intriguingly poised for payrolls. A positive candle formed yesterday reclaimed over 35 pips of the sell-off and broke the sequence of six consecutive negative sessions. The reaction today will show whether there has been a decisive shift in sentiment and the market is now a sell into strength (which the breakdown would suggest) or whether the bulls still have some fight in them. Momentum indicators are now correctively configured and suggest there is a negative bias now. The hourly chart also shows the momentum recovery again failing around levels where the bears have regained control recently, with the hourly RSI failing at 60 and MACD lines rolling over at neutral. Payrolls will have a significant say in the near term direction but the dollar bulls are waiting with baited breath as $1.1500/$1.1540 is now a basis of resistance. A retreat towards $1.1300 would be on the cards with renewed weakness below yesterday’s low at $1.1463. A move above $1.1595 would be a material improvement now.
There is a trend lower over the past two weeks that has come with the market breaking below $1.3000 in recent days. The question is now whether the impressive rebound of 80 pips yesterday (and strong bull candle) is now something more than a rally that will be sold into. The near term chart shows a pivot around $1.3055 which has become a basis of resistance, whilst the mini downtrend comes in at $1.3070 today. Momentum indicators are edging more correctively without being decisively bearish. The Stochastics are negatively configured, but the RSI and MACD lines have been far more resilient. Yesterday’s rebound also helped to form what is now a shallow seven week uptrend. The focus is on payrolls today and whether a decisively dollar positive outcome will be seen. If the market now falls back to breach $1.2930 then a retreat to $1.2800 would certainly be on the cards. A bullish reaction wuld come from a move above $1.3055 and confirmed above $1.3110. This could be a crucial payrolls report.
Today could be a defining day for the bull rally on Dollar/Yen. After Wednesday’s decisive bull candle found some stern resistance and retraced much of the move, the second day reaction will be very telling. Throughout this run higher, the market has not left more than one bear candle in a row, as the buyers have continued to eye an opportunity. However, after the magnitude of yesterday’s negative candle, a second consecutive negative candle would be a blow for the bulls. The market has pulled back to the breakout support at 113.75 around which it is consolidating. However, if the support at 113.50 were to be broken and confirmed on a closing basis (would need a weak payrolls report for this to be seen), then the bull outlook would be compromised. The uptrend of the past four weeks comes in at 113.40. Momentum indicators are quickly accounting for yesterday’s bear session and corrective signals could come about from another negative session today. Resistance at 114.55 is now just under the key November 2017 high of 114.72.
Gold
Gold is back into its wait-and-see mode. After the decisive positive candle from Tuesday re-affirmed the range low support at $1180, a consolidation has set in around $1200 (which is effectively mid-point of the range). Yesterday’s rather uncertain candle reflects this position, whilst the consolidation continues today. For weeks we have been waiting for a decisive move on gold, and it is remarkable how decent the support has been this week given the sharp spike higher on Treasury yields. However a surprise in the payrolls report may finally be the catalyst that moves the price. Momentum indicators are still very neutrally configured moving into payrolls and it would take a close either below $1180 or above $1217 for decisive direction.
WTI Oil
A significantly corrective candlestick has pulled WTI back and questions the immediate strength of the oil price. Losing 2.7% on the day in addition to decisively aborting the positive implications of Wednesday’s move is a blow for the bulls. However the support of a two week uptrend is at $74.00 today and for now the outlook remains to buy into weakness. Tis comes with momentum indicators still strong. However, a second consecutive bear candle today would being to suggest there is a shift in sentiment and profit-taking may be seen. The hourly chart shows the rising 144 hourly moving average (currently around $74.30) has underpinned the rally since mid-September and needs to be watched. However, the deterioration in hourly momentum indicators is now a concern that the bulls need to quickly rectify. If this deterioration continues then it could signal an unwinding move back towards the medium term breakout at $71.65.
After the run higher seemed to lose momentum on Wednesday, a near term corrective move has formed. For now, this looks still just to be another move to help renew upside potential. However, as with all of these moves, there are some important technical signals to watch if this is to become a move that the bulls find more of a concern. The support of a sharper 7 week uptrend (within the three and a half month uptrend channel) comes in around 26,500 today and having been tested yesterday, a breach would realistically be the first negative signal for a while were it to be broken. Momentum indicator remains strongly configured, with the RSI, Stochastics and MACD lines all suggesting that near term slips remain a chance to renew upside potential. There is also a gap at 26,515 which was “filled” by the intraday slip to 26,471, but if this were to be “closed” then this would also be a negative signal. The hourly chart shows that, for now, this is a move that is simply unwinding some overstretched momentum. However the rising 144 hour moving average (now 26,437) will also be an early gauge of something more considerable changing, as this has been flanking the run higher in recent months and has not been decisively breached since mid-August. Hourly momentum also suggests that weakness remains a chance to buy, whilst the reaction low at 26,350 remains a key higher low.
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