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I. Market focus:
Market participants’ attention is focused on the U.S labor market data, set to be released at 13:30 GMT. We have the following picture ahead of their release:
- The U.S. economy is expected to add 181,000 jobs in January versus 148,000 jobs added in December (December’s reading will be revised twice: today and the next month);
- The average value of jobs added is 171,000 over the past 12 months. Over the past six months – 166,000. Over the past three months - 204,000;
Fig. 1 U.S. nonfarm payrolls, month-on-month (Source: The Bureau of Labor Statistics of the U.S. Department of Labor (BLS))
- Unemployment rate is expected to stay at 4.1 percent;
- The private sector in the U.S. added 234,000 jobs in January, according to the ADP report on Wednesday. December’s figure was revised down to 242,000 jobs from a previous reading of 250,000. Analysts expected the private sector to add 186,000 jobs;
- The Institute for Supply Management's (ISM) manufacturing employment sub-index for the U.S. fell to 54.2 in January from 58.1 in December; the ISM’s services employment sub-index will be released on February 5th;
- Job openings decreased to 5.88 million in November from 5.93 million in the previous month;
- Average initial jobless claims for four weeks is 235,000, remaining near 40-year lows;
- The Conference Board reported that 16.4 percent of the respondents experienced difficulties in finding a job in the last reporting month (versus 16.0 percent a month earlier). At the same time, some 37.6 percent of respondents said jobs were plentiful (versus 36.3 percent a month earlier).
Given the data available at the moment, the average forecasts for the payrolls report look rather justified. Strong data from the ADP and the Conference Board indicate the growth in new jobs creation in January, the ISM statistics for the manufacturing sector signal a slowdown in hiring growth. However, it should be borne in mind that the payrolls report is based on an analysis of other reports. There are differences between these reports.
II. The market highlights are:
The European Central Bank (ECB) Governing Council member Ewald Nowotny stated on Thursday he believed the European regulator should stop its asset purchase programme now, but a decision on the programme’s fate would only be reached by September. “I make no secret of the fact that we are now in a situation where, from my point of view, we should end the bond-buying programme,” he said in an interview with the Oberoesterreichische Nachrichten newspaper. “This will then also bring a rise of long-term interest rates,” Nowotny added. The ECB’s official also pointed to the cut in the volume of the current programme to a monthly EUR30 billion in January, which would continue until September. “By then a decision will have been made on what happens afterwards,” he stated.
The data from the Labor Department revealed Thursday the number of applications for unemployment benefits unexpectedly fell last week, pointing to tightening labor market conditions. According to the report, the initial claims for unemployment benefits decreased 1,000 to 230,000 for the week ended January 27. Economists had expected 238,000 new claims last week. Claims for the prior week were revised downwardly to 231,000 from the initial estimate of 233,000. Meanwhile, the four-week moving average of claims fell 5,000 to 234,500 last week. It was the 152nd straight week that claims remained below the 300,000 threshold, the longest streak since 1970.
The preliminary data from the U.S. Labour Department showed Thursday that labour productivity in the United States decreased 0.1 percent q-o-q in the fourth quarter, as output rose 3.2 percent q-o-q and hours worked increased 3.3 percent q-o-q (seasonally adjusted). That was the first decline in productivity since the first quarter of 2016 and was missed the economists’ forecast for a 1.0 percent q-o-q gain after a revised 2.7 percent q-o-q increase in the third quarter (originally a 3.0 percent surge). In y-o-y terms, the labor productivity rose 1.1 percent in the fourth quarter, reflecting a 3.2-percent surge in output and a 2.1-percent increase in hours worked. Meanwhile, unit labor costs in the nonfarm business sector in the fourth quarter rose 2.0 percent compared to a revised 0.1 percent q-o-q drop in the prior quarter (initially a 0.2 percent q-o-q decline). Economists had forecast a 0.9 percent gain in fourth-quarter unit labor costs. Unit labor costs quarterly growth reflected primarily to a 1.8-percent increase in hourly compensation. Compared to the corresponding period of 2016, unit labor costs rose 1.3 percent.
A report from Institute for Supply Management (ISM) revealed on Thursday the U.S. manufacturing sector expanded in January, and the overall economy grew for the 105th consecutive month. The ISM's index of manufacturing activity came in at 59.1 percent last month, down 0.2 percentage points from the downwardly revised December 2017 figure of 59.3 percent, beating economists' forecast for a 58.8 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction. The slight decrease by the headline index was attributable to a slowdown in the employment index (-3.9 percentage points m-o-m to 54.2 percent), the new orders index (-2 percentage points m-o-m to 65.4 percent) and the production index (-0.7 percentage point m-o-m to 64.5 percent). Of the 18 manufacturing industries, 14 reported growth in January. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, "The past relationship between the PMI and the overall economy indicates that the average PMI for January (59.1 percent) corresponds to a 4.9 percent increase in real gross domestic product (GDP) on an annualized basis."
The Australian Bureau of Statistics (ABS) reported on Friday the final demand producer price index (PPI) in Australia increased by 0.6 percent q-o-q in the fourth quarter of 2017, following a 0.2 percent q-o-q rise in the prior quarter. Economists had forecast a 0.2 percent q-o-q gain. According to the report, the rise was mainly driven by the prices received for petroleum refining and petroleum fuel manufacturing (+11.9 percent q-o-q), heavy and civil engineering construction (+0.7 percent q-o-q) and building construction (+0.4 percent q-o-q). On the contrary, the result was partly offset by falls in the prices received for sugar and confectionery manufacturing (-3.9 percent q-o-q), tobacco product manufacturing (-3.8 percent q-o-q) and sheep, beef cattle and grain farming and dairy cattle farming (-3.6 percent q-o-q). Through the year to the December quarter, the PPI increased 1.7 percent, up from 1.6 percent in the prior quarter.
III. Market Situation
The currency pair EUR/USD fell slightly, retreating from the high of January 25, reached the previous day in response to the broad weakening of the U.S. currency and the statement of the ECB Governing Council member Ewald Nowotny. The pair was pressured by the partial profit-taking by investors and adjustments of the positions ahead of the release of the key report on the U.S. labor market. It is expected that the report will confirm a strong picture for the U.S. economy, arguing in favor of further increases in rates and a strong dollar. According to economists’ estimates, the unemployment rate remained at 4.1 percent in January, the nonfarm payrolls rose by 180,000 after gaining 148,000in December, and the average hourly earnings rose by 0.3 percent, the same as in the previous month. In addition, the final reading of the Reuters/Michigan consumer sentiment index for January, data on factory orders for December, and the speech of San Francisco Fed President John Williams will be in focus today. Resistance level - $1.2569 (high of December 16, 2014). Support level - $1.2335 (low of January 29/30).
The currency pair GBP/USD consolidated near the opening level while keeping near the high of January 26, due to the lack of new drivers. In addition, market participants awaited the release of the UK data on business activity in the construction sector and the U.S. labor market statistics. It is expected that the UK construction PMI rose to 52.8 points in January from 52.2 points in December. However, it is possible that the January figure will be disappointing. Yesterday, IHS Markit's PMI survey for the UK manufacturing sector showed that January's reading for the sector came in at 55.3, down from 56.3 in December, missing economists’ forecasts of a further acceleration in growth to 56.5. Overall, market participants will focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.4343 (high of January 25). Support level - $1.3977 (low of January 30).
The currency pair AUD/USD fell sharply, touching yesterday's low, as the resumed growth in the U.S. dollar offset upbeat data from Australia. Some experts note that the difference between interest rates, in the long run, will cause an even greater fall in the Australian dollar. At the moment, the effect of the difference between the interest rates has weakened, but it is likely to increase and will be one of the key drivers. When this happens, the Australian dollar will face challenges. At the same time, the rise in commodity prices, investors' sentiment toward risky assets and the broad weakness of the U.S. dollar, which contributed to the growth of the Australian currency in recent years, have gone too far. Resistance level - AUD0.8134 (high of January 26). Support level - AUD0.7637 (low of January 16).
The currency pair USD/JPY traded moderately higher, near the high of January 26. The catalyst for the pair's growth was the broad strengthening of the U.S. dollar and adjustments of the positions ahead of the release of the US labor market data. Recall that December's employment growth of 148,000 was less than expected due to decline in hiring in the retail trade. Although the December reading was slightly weaker, it followed strong gains in October and November. On average, the U.S. economy added 203,700 new jobs in the fourth quarter of 2017, which was the strongest three-month average since September 2016. It is expected that the growth pace of job creation will slow from 171,300 per month in 2017 to 163,000 per month in 2018 and to 148,000 per month in 2019. Weaker growth is expected due to low unemployment, which is likely to average 4 percent in 2018 and 3.8 percent in 2019. Resistance level - Y111.18 (high of January 26). Support level - Y108.28 (low of January 26).
U.S. stock indexes closed mixed on Thursday, as investors watched yields rise to multi-year highs, digested a tech-heavy batch of fourth-quarter earnings, and looked ahead to Friday's release of key data on the U.S. labour market for January. The focus also was on a raft of economic reports. The data from the Labor Department revealed the number of applications for unemployment benefits unexpectedly fell last week, pointing to tightening labor market conditions. According to the report, the initial claims for unemployment benefits decreased 1,000 to 230,000 for the week ended January 27. Economists had expected 238,000 new claims last week. It was the 152nd straight week that claims remained below the 300,000 threshold, the longest streak since 1970. The preliminary data from the U.S. Labour Department showed that labour productivity in the United States decreased 0.1 percent q-o-q in the fourth quarter, as output rose 3.2 percent q-o-q and hours worked increased 3.3 percent q-o-q (seasonally adjusted). That was the first decline in productivity since the first quarter of 2016 and was missed the economists’ forecast for a 1.0 percent q-o-q gain after a revised 2.7 percent q-o-q increase in the third quarter (originally a 3.0 percent surge). Meanwhile, unit labor costs in the nonfarm business sector in the fourth quarter rose 2.0 percent compared to a revised 0.1 percent q-o-q drop in the prior quarter (initially a 0.2 percent q-o-q decline). Economists had forecast a 0.9 percent gain in fourth-quarter unit labor costs. A report from Institute for Supply Management (ISM) revealed the U.S. manufacturing sector expanded in January, and the overall economy grew for the 105th consecutive month. The ISM's index of manufacturing activity came in at 59.1 percent last month, down 0.2 percentage points from the downwardly revised December 2017 figure of 59.3 percent, beating economists' forecast for a 58.8 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction.
Asian stock indexes closed mixed on Friday, following a mixed session in the U.S. Investors awaited the U.S. employment situation report for January and digested corporate earnings.
European stock indexes are expected to trade mixed in the morning trading session.
Yields of US 10-year notes hold at 2.79% (0 basis points)
Yields of German 10-year bonds hold at 0.72% (0 basis points)
Yields of UK 10-year gilts hold at 1.53% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in March settled at $66.11 (+0.47%). The crude oil prices rose, continuing yesterday's dynamics. Gradually, the market participants’ focus shifts to the weekly data on the U.S. oil rig count from Baker Hughes, set to be released at 18:00 GMT.
Gold traded at $1348.80 (+0.02%). Gold prices were little changed after the solid gain the previous day. The further growth of gold prices was limited by the positive dynamics of the U.S. currency and investors’ cautious stance ahead of the release of the key U.S. labour market data. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.04 percent to 88.70 Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important news that are expected (time GMT0)
Producer Price Index
Private Nonfarm Payrolls
Labor Force Participation Rate
Average hourly earnings
Reuters/Michigan Consumer Sentiment Index
Baker Hughes Oil Rig Count
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