Crucial Advice

The Chinese Department of Price

Is proffering crucial advice

Don’t think about hoarding

It won’t be rewarding

And don’t make us speak to you twice!

There really is such a thing as the Department of Price in China.  It is part of the National Development and Reform Commission, the Chinese economic planning agency, although I have to admit it sounds more like something from Atlas Shrugged than a real agency.  But soaring commodity prices during the past year have become quite the problem for China, resulting in rising inflation and shortages of inputs for their manufacturers.  Apparently, President Xi is not pleased with this result and so this obscure (absurd?) government agency is now tasked with preventing prices from rising across a range of commodities.  Their tactics include threats against buyers deemed to be hoarding, against speculators in commodity trading firms and against manufacturers for passing on rising input costs to their final customers.  While one cannot help but chuckle at the futility of this effort (prices of things in demand will rise or shortages will result) it also highlights just how much of a concern inflation is to the Chinese and helps explain the recent PBOC action regarding FX reserves in order to stop/reverse the renminbi’s recent strength.  While a stronger renminbi would help ease inflationary pressures, its impact on exports, especially with input prices rising, was just too much to take.  For the foreseeable future, you can expect USDCNY to rise in a slow and steady manner.

Along with the FOMC

Investors are anxious to see

The payroll release

With forecast increase

To offset last month’s perigee

Turning to today’s news, markets remain quiet and rangebound ahead of this morning’s NFP report.  Last month’s abysmal outcome, just 266K new jobs, hugely below the nearly one million expected has increased the concern today.  While yesterday’s ADP Employment report was spectacular at 978K, last month it was nearly 750K and we still got that huge surprise.  Estimates this morning range from 335K to 1000K which tells us that nobody really knows, and none of the econometric models out there are well tuned to the current economic circumstances.  Here are the current median forecasts according to Bloomberg:

Nonfarm Payrolls 674K
Private Payrolls 610K
Manufacturing Payrolls 25K
Unemployment Rate 5.9%
Average Hourly Earnings 0.2% (1.6% Y/Y)
Average Weekly Hours 34.9
Participation Rate 61.8%
Factory Orders -0.3%

Following yesterday’s ADP report, the dollar, which had been drifting higher, got a huge boost and rallied strongly versus all its counterparts.  In addition, we saw sharp declines in precious metals prices and more modest declines in bond prices (yields on the 10-year rose about 4bps).  Arguably, that is exactly what one would expect with news that the US economy is growing more rapidly than previously thought.  But that begs the question for today, has the market already priced in a much larger number and so become subject to some serious profit-taking on a ‘sell the news’ meme?  My sense is that we will need to see a very large number, something on the order of 1.3 million to continue yesterday’s price action in markets.  Anything less, even if above the median forecast, will likely be seen as toppish and given it is a summer Friday, traders will be quick to square up positions.

Obviously, the FOMC is watching this data closely.  Recall, their stated goal is maximum employment and they continue to harp on the 8.1 million jobs that have not yet been replaced due to the Covid shutdown as well as the 2 million jobs that would have otherwise been created based on trend growth prior to the shutdown.  The point is that, given the transitory inflation pressures theme that has been universally repeated by every FOMC member, the Fed seems very likely to maintain the current policy settings for a while yet.  So, while today’s number is important for the market’s understanding of the current situation, I don’t believe there is any number that will change Fed policy.  At least no large number.  On the flipside, a second consecutive weak number might just encourage discussion that the current QE is not sufficient.  It will certainly raise eyebrows and cause a great deal of angst at the next FOMC meeting in two weeks’ time.

At this point, however, there is nothing we can do but wait.  A recap of the overnight activity shows that equity markets had minimal movements with no major index moving more than 0.4% (Nikkei -0.4%) and US futures essentially unchanged at this time.  Bond markets are exhibiting the same lack of direction, with movements less than 1 basis point ahead of the release across Treasuries and European sovereigns.  Commodity prices, after yesterday’s spectacular declines in the precious metals of more than 2%, have stabilized with oil drifting slightly higher (WTI +0.3%), and metals and agricultural prices either side of unchanged.

Finally, the dollar has also been ranging with no G10 currency having moved more than 0.2% from yesterday’s closing level and an even spread of gainers and losers.  In other words, everyone is biding their time here.  EMG currencies have displayed a bit more weakness, but much of that is due to last night’s APAC session where most currencies fell in response to the ADP number, just like everything else did during yesterday’s NY session.  Looking at the EEMEA currencies, only PLN (-0.4%) is showing any type of noteworthy movement and that mostly appears to be a reaction to the fact it has been amongst the best performers over the past month, having gained more than 3.0%, and so is subject to more profit-taking.  In other words, every market is simply biding its time ahead of the release.

Away from the payroll report, Chairman Powell does speak this morning, but the focus is on climate change, not monetary policy, so it seems unlikely we will learn very much.  And after this, the Fed is in its quiet period ahead of the meeting, so we are left to our own devices to determine what will happen.

My sense is we will see a strong showing today, maybe 750K as well as a revision up to last month’s data, which was abnormally weak given other indicators, but I am hard pressed to see the dollar repeat yesterday’s gains.  Rather, consolidation into the weekend seems the most likely outcome.

Good luck, good weekend and stay safe

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