Non-Farm 2017-05-05

BarroMetrics Views: Non-Farm 2017-05-05 

As expected, the FOMC meeting left rates unchanged. In fact,  in its statement, it said little outside expectations. As far as market reactions go, it was a non-event.

The next event for ‘inflexion week’ are the Non-Farm Payrolls due 8:30 am EST on Friday.

Expectations:

  • Consensus:  185K
  • Consensus Range: 150K to 225K
  • Unemployment Rate Consensus: 4.6%
  • Unemployment Rate Consensus Range: 4.5% to 4.6%

One thing the FED made clear: it feels a need to raise rates twice this year and a need to change its balance sheet program. I expect the balance sheet announcement to made in December 2017. So, that leaves only the timing of the rate rises. The FED has signaled it wants one in June, so that leaves only the final rise to determine.

If the rate rise is to occur in June, then Friday’s data will have to come in at least within consensus, especially given the 98K number last month (expectations were for 175K).  And, given my view that the job numbers are driven by FED needs, normally I’d say that my confidence rating for a consensus (and above consensus) number would be 8 (where 0 is ‘no confidence’ and 10 is ‘certain).

This month there is, however, an additional wrinkle. Studies show there is a correlation between the ADP month to month trend with the Non-Farm month-to-month.  This month’s ADP came in at 177K (consensus 170K) BUT down from last month’s 263K.  If the indicator is on track, then we should see a Non-Farm number below 98K.

So, we have a conflict between my two indicators. My resolution is an easy one: I’ll go with my gut with an allowance for the ADP signal. This means I’m looking for a number between 150K to below 175K.

Such a number will probably produce a ho-hum reaction in the USD and US stock market.

Let’s see what happens.

(Message for Michael Hack: Please see my comment to your request posted at ‘Trading A Fundamental Event)

The French Elections

BarroMetrics Views: The French Elections

The results are in, even before the elections are held: Macron will win. He will secure 64% of the vote – and he has been endorsed by Fillon and Hamon.

So, is there any chance of Le Pen winning? If she does, what market reaction can we expect? If she loses what market reaction can we expect?

I must admit to not following French politics as closely as I follow the US and UK. Consequently, I don’t have a feel for the French outcome. The bookies say Le Pen is a 13/2 chance. Are these odds true? Because I don’t have a feel, I’ll assume they are.

So, what can we expect to see if she loses?

EUR and European stock markets up. If the first round results are anything to by, the move North should be something to see. I expect US stocks to follow suit. (Figures 1 to 3)

The more interesting question is: how will both asset classes react if Le Pen wins?

Undoubtedly, the EUR and the CAC will dive. I expect the FTSE and DAX to follow suit. The US? I am not so sure. It did follow the European bourses following the first round results. But, we didn’t have the Non-Farm ahead of the 1st Round as we do this time. Will a Le Pen victory overturn a poor Non-Farm?

What will I be doing on this occasion? Probably standing aside, but I’ll make up my mind closer to the event.

Figure 1 CAC Daily

Figure 2 DAX Daily

Figure 3 EURUSD Daily

Figure 4 S&P Daily

Budget Deal?

BarroMetrics Views: Budget Deal?

I am commenting today rather than tomorrow because it looks like the markets were correct about the potential of a US Government shutdown.

Last night, Democrats and Republicans agreed on a USD 1t spending agreement.  The bill needs to be passed and signed off by Trump by Friday, May 5.

The agreement has something for both sides. For the Democrats, money for funding the National Institutes of Health (Obamacare), and continued funding for federal government activities. For Trump, there will be increased spending for the military.

Because of the Democratic support, Trump does not need to worry that the House Freedom Caucus will upset the deal like they did the Health Bill.

Once thing is certain, it doesn’t look like Trump, despite all the promises to the contrary, will be doing much to balance the budget. This spending bill will clearly increase rather than decrease the deficit.

So far as the markets are concerned, it’s unlikely the news will have much impact.

Inflection Week?

BarroMetrics Views: Inflection Week?

It’s shaping up to be an interesting week:

  • I expect today to be quiet given that for the most influential Asian countries (Japan and China) as well as many European countries (notably the UK, France and Germany), we have the Labour Day hols.
  • May 3 is also likely to be quiet because HK (where much of the Chinese trade is done) and Japan have another holiday.
  • On May 3, 14:00 EST the FOMC announce their decision – rates should remain unchanged given last month’s GDP, inflation and Non-Farm.
  • Then on Friday, May 5, we have an important Non-Farm Payrolls number.
  • On May 7, we have the French elections.
  • Sometime this week, but no later than Friday. May 5, the US Funding Bill (funding the US Government to Sept 30) has to be passed – UNLESS there is another stop-gap vote. So far, the stock market and dollar have ignored the possibility of a Government shutdown.

Today, I’ll have a look at the Non-Farm payrolls and on Thursday, May 4, I’ll comment on the French Elections as well as sending out the video to those who requested it. I’ll comment on the Funding Bill on Wednesday, May 3.

This month’s Non-Farm will be important as an indicator to the FED’s interest rate raising roadmap. Yellen has signalled a rise in June followed by one more rise.

Last month the consensus number was 175K new jobs and an unemployment rate of 4.7%. The rate came in at 4.5% (better than expected), but new jobs came it at 98k. The shortfall was attributed to the weather.

On Friday, the consensus number is 185K with a range of 150K to 225K; the unemployment rate is expected at 4.6 with a range of 4.5% to 4,6%. Numbers below the consensus range will cast doubt on the three-rise plan; numbers above the range will probably give birth to the idea of more than three rises in 2017.

My view is we’ll see consensus numbers. This result should pretty much keep the USD and US stock market on an even keel. Below consensus numbers will send the USD down; above consensus numbers, the USD and stock market, up.  I’m not sure what effect a below consensus number will have on the US stocks.

“Trading A Fundamental Event”

BarroMetrics Views: “Trading A Fundamental Event.”

Yesterday I posted a video about how to trade a setup I call ‘Trading A Fundamental Event’. The conditions are:

  1. There is a fundamental event capable of moving markets strongly in one direction e.g. Britexit
  2. The trader perceives that the market has mispriced the odds of a variation of the event e.g. the probability of a Britexit.
  3. The mispriced variation occurs.

In the video, I took the view that the polls and betting had mispriced either:

  • A Le Penn victory where she secured at least 40% of the vote, and
  • A Le Penn, Melenchon victory.

As it has turned out, I was wrong. The polls got it right; the May 7 run-off will be between will be between Macron and Le Penn (24%and 22% on votes cast as at 1:13 am BST).

The expected result produced a gap on the EUR and risk-taking currencies of around 200 pips.  A gap because the results started coming out while the FX markets were closed.

As far as my trading is concerned, no gain, no loss. I did not get the scenario I needed to trigger a trade. To round off the series, we’ll be producing another video on May 7. But, you will need to leave your contact details to received the follow-up.

The French Elections and You

BarroMetrics Views: The French Elections and You

To understand the impact of the French elections on the US and thus the other parts of the world, we need only compare US-EU trade relations.

Here’s how European Commission describes the US-EU trade picture:

  • Total US investment in the EU is three times higher than in all of Asia.
    EU investment in the US is around eight times the amount of EU investment in India and China together.
  • EU and US investments are the real drivers of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. It is estimated that a third of the trade across the Atlantic actually consists of intra-company transfers.
  • The transatlantic relationship also defines the shape of the global economy as a whole. Either the EU or the US is the largest trade and investment partner for almost all other countries in the global economy.
  • The EU and the US economies account together for about half the entire world GDP and for nearly a third of world trade flows.

So, any disruption to the US-EU trade would be significant at any time but especially now as both grapple with the effects of barely reviving economies.

With that in mind, let’s have a look at the candidates for April 23 and the process for determining who will go into the second round on May 7. The percentage after the name is the latest poll result from PresoTrack OpinionWay (Margin of error is 2.2%).

  1. Emmanuel Macron 23% (remain in EU)
  2. Marine LePen 22% (exit EU and freeze Immigration)
  3. Francois Fillon 20% (remain EU)
  4. Jean-Luc Melenchon 19% (but has seen a huge surge in past few weeks) (renegotiate EU and if renegotiation is unsuccessful, withdraw EU).

If no candidate wins 50% of the vote, then the two top contenders will run-off on May 7. I have been unable to determine what would happen if two of the contenders tie on Sunday. For example: LePen 25%, Macron 24%, Melenchon 24%.

I give little chance that Fillon will overcome his scandal taint. I believe Melenchon’s recent momentum provides him with an opportunity of challenging Macron and LePen.

The polls suggest that LePen will win the first round and lose the second, irrespective of whoever is her challenger: Macron will win with 64% of the vote and Fillon will win with 58% of the vote. Against Melenchon: “According to the polls, he beats her by a greater margin than François Fillon but a smaller one than Emmanuel Macron.”

The wild card in the mix is voter turnout. It’s expected to be a record low, but from all reports, Le Pen has a motivated base (akin to Trump). If the voters (for all candidates) turn up in the numbers expected, I do see a Le Pen victory.

I’ll finish this tomorrow. Yes, I know it’s Saturday. Still, I’d like to get in my two-cents in before Sunday’s election although we probably won’t know the results until Monday afternoon (HK time).

 

 

NFP-Sidelined?

BarroMetrics Views: NFP-Sidelined?

Syria, the meeting with Xi Jinping, the Russian probe (& Rice)….! All vying for our attention. It’s easy to forget that there is a piece of news out tonight, 20:30 HK time that may push all of the geopolitical news aside, the NFP.

It’s important to bear in mind that the Trump rally has been attributed to a belief that he’ll be able to pass legislation that will reinvigorate the US economy. His failure to get consensus on the Ryan Health Bill shows how difficult the passing of tax reform, infrastructure spending, etc. will be.  The more that time passes without signs of progress, the more likely that US stocks will head South.

On top of all that we have seen two vacancies appear in the past few days:

  1. Daniel Trullo (voting member, dove),
  2. Jeffrey Lacker (non-voting, hawk).

Given this background, what sort of impact will today’s NFP provide? As always, it needs to be a number outside consensus range. Figure 1 shows the data from Nasdaq’s Economic Calendar. I have also included the ADP numbers that were released on Wednesday. Why?

There is an interesting relationship between the ADP and NFP: the NFP tends to follow the ADP progression of a month-to-month comparison. On Wednesday, we saw an ADP number of 263,000 for March down from last month’s 298,000 (Jan’s was 246,000). The 263,000 was much larger than consensus expectations. For this reason, the pundits are suggesting that we’ll see a larger than expected NFP of 175K.

My view is, given the decline this month in the ADP (from 298k to 263k), we are more likely to see an NFP  number below 235K (last month’s NFP). And, given that the FED is determined to raise rates, we’ll see a number closer to 175K. In effect, we’ll have a ho-hum number. Ah well, back to the geopolitical factors.

Let’s see what tonight brings.

FIGURE 1 NFP Consensus

The US Divide

BarroMetrics Views: The US Divide

The article in the Wall Street Daily, “The Epic Divide in Consumer Sentiment” shows how divided the US is.

If you are a Democrat,  the Consumer Confidence is warning of a looming recession; if you are a Republican, boom times ahead!

I strongly recommend you read the piece and ask: “How will this divide affect the instruments I trade?”

 

 

A Nation Divided?

BarroMetrics Views: A Nation Divided?

Yesterday, I was watching CNN and Fox and could not help but be struck by the thought that, today, the US is hopelessly divided along ideological lines – Democrats and Republicans. Neither party or group seems to be willing to work towards getting the economy going and working past the Washington gridlock that passes for governing.

Let’s just take a quick gander at just one event: The nomination of Neil Gorsuch to the Supreme Court 

Gorsuch has been nominated to replace Antonin Scalia who died in February 2016. The Supreme Court is locked 4-4 since Judge Scalia’s death. By that I mean four of the judges are liberal, and four are conservative – think of it as a clash between judicial restraint (conservatives) and judicial activism (liberals).

Justice Scalia was a conservatist with a towering reputation and had placed a stamp on the Supreme Court during his tenure. With his death during Obama’s last term provided the Democrats with an opportunity to reverse the tide of decisions that they saw as going against them. (See for example The Simply Breathtaking Taking Consequences of Justice Scalia’s Death).

Unfortunately for the Democrats, the Republican-controlled Senate refused to hold hearings on Obama’s pick, Judge Merrick Garland because it was Obama’s last year in office.

That sets the context.

Let’s turn to the current situation.

Judge Neil Gorsuch is a judge in the Justice Scalia mold (See, for example In Judge Neil Gorsuch, an Echo of Scalia in Philosophy and Style). Yet in his nomination to the Denver-based 10 Circuit Court of Appeals, he had overwhelming Democratic support.

Today, the Senate Democrats will block Gorsuch’s nomination with a filibuster. The Republican’s have said if that happens, they will employ the ‘nuclear option’ and change the numbers needed for nomination from sixty (60) to a simple majority of 51. This tactic was first used by

This tactic was first used by the Democrats in 2013 to eliminate filibusters on executive branch nominations and federal judicial appointments except for those to the Supreme Court. The Republicans will now extend that option to Supreme Court nominations.  Given the House and Senate constitution, the nuclear option will guarantee Gorsuch’s nomination.

But, the battle has shown that there is little chance of the two parties coming together. This may have severe consequences on passing Trump bills that are not supported by some Republicans e.g. the Obama Health Care Repeal. One such bill is the Cross-Border Tax.

What does this mean for the stock market? The rally since the Trump election appears to be based on the sentiment that we’ll see the massive changes to lift US growth. This battle seems to say that this confidence is misplaced. How then will the stock market react when its expectations are dashed?

 

Wither S&P?

BarroMetrics Views: Wither S&P?

With Singapore seminar occupying most of my time, this blog has suffered. I’ll be looking to resume posting four times a week.

The S&P is, for me, in no man’s land.

After the Trump rally on Nov 9, I was looking for a parabolic wave 5 to end this structure.  That scenario was looking good until March 1. The subsequent down move was too strong for a parabolic wave.  So, I thought we might have seen a top – even though my price targets had not been reached. But, the move south from the reaction high at 2391.80 was too weak to be the start of a bear. And, so far, the move up has been anaemic.

I’m waiting for the market to give a signal in the form of a breakout above 2402 or breakdown below 2320.

Figure 1 shows the structure.

FIGURE 1 S&P 5-d and 18-d Swings