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I. Market focus
Market participants’ attention is focused on the U.S labor market data, set to be released at 12:30 GMT. We have the following picture ahead of their release:
- The U.S. economy is expected to add 194,000 jobs in October versus 134,000 jobs added in September (September’s reading will be revised twice: today and the next month);
- The average value of jobs added is 206,000 over the past 12 months. Over the past six months – 203,000. Over the past three months - 190,000;
Fig. 1 U.S. nonfarm payrolls, month-on-month (Source: The Bureau of Labor Statistics of the U.S. Department of Labor (BLS))
- The unemployment rate is expected to stay unchanged at 3.7 percent;
- The private sector in the U.S. added 227,000 jobs in October, according to the ADP report on Wednesday. September’s figure was revised down to 218,000 jobs from a previous reading of 230,000. Analysts expected the private sector to add 188,000 jobs;
- The Institute for Supply Management's (ISM) manufacturing employment sub-index for the U.S. fell to 56.8 in October from 58.8 in September; the ISM’s services employment sub-index will be released on November 5;
- Job openings rose to 7.14 million in August from 7.08 million in the previous month;
- Average initial jobless claims for four weeks is 212,000, remaining near the lowest level since mid-1969;
- The Conference Board reported that 13.2 percent of the respondents experienced difficulties in finding a job in the last reporting month (versus 14.1 percent a month earlier). At the same time, some 45.9 percent of respondents said jobs were plentiful (versus 44.1 percent a month earlier).
Given the data available at the moment, the average forecasts for the payrolls report look somewhat understated, and it seems very likely that the data will show a bigger-than-expected increase in nonfarm payrolls. Arguments in support of such expectations are the Conference Board’s data and a low number of applications for unemployment aid. At the same time, the picture is somewhat clouded by the decline in the ISM manufacturing employment sub-index, but in this case, it only indicates a slowdown in the pace of growth of hiring activity, not its decline. 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.
Data on changes in average earnings can have a particularly strong influence on the markets’ dynamics. It is expected that the average hourly earnings growth slowed to 0.2 percent m-o-m in October from 0.3 percent m-o-m in the prior month.
II. The market highlights are:
The preliminary data from the U.S. Labour Department showed Thursday that labor productivity in the United States increased 2.2 percent q-o-q in the third quarter, as output advanced 4.1 percent q-o-q and hours worked rose 1.8 percent q-o-q (seasonally adjusted). That was in line with economists’ forecast for a 2.2 percent q-o-q gain after a revised 3.0 percent q-o-q increase in the second quarter (originally a 2.9 percent surge). In y-o-y terms, the labor productivity rose 1.3 percent in the third quarter, reflecting a 3.7-percent surge in output and a 2.4-percent increase in hours worked. Meanwhile, unit labor costs in the nonfarm business sector in the third quarter rose 1.2 percent compared to an unrevised 1.0 percent q-o-q drop in the prior quarter. Economists had forecast a 1.0 percent gain in third-quarter unit labor costs. Unit labor costs quarterly growth reflected primarily to a 3.5-percent increase in hourly compensation and a 2.2-percent advance in labor productivity. Compared to the corresponding period of 2017, unit labor costs rose 1.5 percent.
A separate report from the U.S. Labour Department revealed the number of applications for unemployment benefits fell last week, pointing to tight labor market conditions. According to the report, the initial claims for unemployment benefits decreased 2,000 to 214,000 for the week ended October 27. Economists had expected 213,000 new claims last week. Claims for the prior week were revised upwardly to 216,000 from the initial estimate of 215,000. Meanwhile, the four-week moving average of claims rose 1,750 to 213,750 last week.
A report from the Institute for Supply Management (ISM) showed Thursday the U.S. manufacturing sector expanded in October at a slower pace than in September. The ISM's index of manufacturing activity came in at 57.7 percent last month, down 2.1 percentage points from the unrevised September figure of 59.8 percent, missing economists' forecast for a 59.0 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction. The monthly drop by the headline index was primarily attributable to slower increases in the new orders index (-4.4 percentage points m-o-m to 57.4 percent in October), the production index (-4.0 percentage points m-o-m to 59.9 percent), the inventories index (-2.6 percentage points to 50.7 percent) and the employment index (-2.0 percentage point m-o-m to 56.8 percent). These declines, however, were somewhat offset by gains in the prices index (+4.7 percentage points m-o-m to 71.6 percent in October) and the supplier deliveries index (+2.7 percentage points m-o-m to 63.8 percent). 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 PMI for October (57.7 percent) corresponds to a 4.5-percent increase in real gross domestic product (GDP) on an annualized basis.”
The Australian Bureau of Statistics (ABS) reported on Friday that Australia’s retail sales rose 0.2 percent m-o-m in September, following a 0.3 percent m-o-m performance in August. Economists had forecast retail sales would increase 0.3 percent m-o-m in September. According to the ABS, the rises in food retailing (0.4 percent m-o-m) and cafés, restaurants and takeaways (+0.5 percent m-o-m) were offset by a fall in clothing, footwear and personal accessories (-1.2 percent m-o-m). Meanwhile, other retailing (0.0 percent m-o-m), household goods (0.0 percent m-o-m) and department stores (0.0 percent m-o-m) were relatively unchanged.
III. Market Situation
The currency pair EUR/USD rose slightly, refreshing a weekly high, due to the further weakening of the U.S. currency and the adjustments of positions by investors ahead of the publication of key data on the U.S. labor market. It is expected that employers probably added 190,000 new jobs last month, keeping the unemployment rate steady at 3.7 percent. This would follow a more modest increase of only 134,000 new jobs in September. However, Hurricane Florence was largely to blame for the depressed job growth in September, as about 300,000 workers said they could not work due to bad weather. Overall, there no signs of a cooling labor market. Resistance level - $1.1493 (high of October 23). Support level - $1.1301 (low of October 31).
The currency pair GBP/USD traded near the opening level, as investors took a breather after the previous day’s rally in the pair, triggered by the optimistic Brexit-related news, the outcomes of the Bank of England (BoE) meeting, as well as the widespread weakening of the U.S. currency. Market participants were also preparing for the release of the UK’s data on business activity in the construction sector. According to economists’ forecast, the construction PMI probably fell to 52.0 points in October from 52.1 points in September. Apart from the data, traders will also focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3131 (high of October 18). Support level - $1.2696 (low of October 30).
The currency pair AUD/USD rose sharply, continuing the previous day’s rally, and hitting its highest level since end-September. The catalysts for this were positive data from Australia, the weakening of the U.S. currency, and the improvement of investor risk appetite amid reports about potential progress in U.S.-China trade relations. As for the data, the Australian Bureau of Statistics (ABS) reported that final demand producer prices in Australia rose 0.8 percent q-o-q in the third quarter, accelerating from a 0.3 percent q-o-q gain in the prior quarter. Economists had expected a 0.2 percent q-o-q advance. According to the report, the Q3 increase was mainly attributable to rises in the prices received for heavy and civil engineering construction (+1.0 percent q-o-q), petroleum refining and petroleum fuel manufacturing (+5.2 percent q-o-q) and computer and electronic equipment manufacturing (+2.7 percent q-o-q), which, however, were partly offset by falls in the prices received for cleaning compound and toiletry preparation manufacturing (-3.1 percent q-o-q). On a yearly basis, producer prices rose 2.1 percent in the September quarter, up from 1.5 percent in the three months prior. Meanwhile, another report from the ABS showed that Australia’s retail sales rose 0.2 percent m-o-m in September, following a 0.3 percent m-o-m performance in August. Economists had forecast retail sales would increase 0.3 percent m-o-m in September. Resistance level - AUD0.7267 (high of September 27). Support level - AUD0.7067 (low of October 31).
The currency pair USD/JPY traded solidly higher, supported by partial profit taking and weakening demand for a “safe” yen in response to improved risk appetite. Investors also digested the statements of the Japanese Prime Minister Shinzo Abe, who warned against forcing through a proposed sales tax hike next year if economic conditions worsened, a sign he was open to postponing the increase for a third time if circumstances required it. The premier has already postponed an increase in the domestic consumption tax to 10 percent from 8 percent twice, including in 2016 when he cited global risks that could adversely affect Japan’s economy. However, he has more recently affirmed that he intends to stick with the current timeframe to increase the tax rate in October 2019. Resistance level - Y113.37 (high of October 31). Support level - Y111.36 (low of October 26).
U.S. stock indexes closed higher on Thursday, supported by strong corporate earnings and favorable comments from the U.S. President Donald Trump on trade talks with China. Trump said in a tweet Thursday that he had a "long and very good conversation" with Chinese President Xi Jinping on trade. He also said meetings between the two at the upcoming G-20 summit are being scheduled. Focus also was on a preliminary report on productivity and unit labor costs in the third quarter, the weekly jobless claims, and the ISM manufacturing index for October. The preliminary data from the U.S. Labour Department showed that labor productivity in the United States increased 2.2 percent q-o-q in the third quarter, as output advanced 4.1 percent q-o-q and hours worked rose 1.8 percent q-o-q (seasonally adjusted). That was in line with economists’ forecast for a 2.2 percent q-o-q gain after a revised 3.0 percent q-o-q increase in the second quarter (originally a 2.9 percent surge). Meanwhile, unit labor costs in the nonfarm business sector in the third quarter rose 1.2 percent compared to an unrevised 1.0 percent q-o-q drop in the prior quarter. Economists had forecast a 1.0 percent gain in third-quarter unit labor costs. A separate report from the U.S. Labour Department revealed the number of applications for unemployment benefits fell last week, pointing to tight labor market conditions. According to the report, the initial claims for unemployment benefits decreased 2,000 to 214,000 for the week ended October 27. Economists had expected 213,000 new claims last week. A report from the Institute for Supply Management (ISM) showed the U.S. manufacturing sector expanded in October at a slower pace than in September. The ISM's index of manufacturing activity came in at 57.7 percent last month, down 2.1 percentage points from the unrevised September figure of 59.8 percent, missing economists' forecast for a 59.0 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction.
Asian stock indexes closed higher on Friday, supported by Wall Street’s strong performance overnight and hopes that the U.S. and China can resolve their trade dispute.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.18% (+4 basis points)
Yields of German 10-year bonds hold at 0.40% (0 basis points)
Yields of UK 10-year gilts hold at 1.32% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in December settled at $63.56 (-0.20%). The crude oil prices fell slightly as evidence of increased crude inventories and production in the world outweighed supply concerns from the start of U.S. sanctions next week against Iran's petroleum exports. In addition, market participants were preparing for the release of weekly data on the U.S. oil rig count from Baker Hughes (due at 17:00 GMT).
Gold traded at $1,233.40 (+0.01%). Gold prices consolidated near the opening level, as investors took a breather after the previous day’s rally while awaiting October's nonfarm payrolls report, which is expected to provide clues on the pace of further interest rate rises by the Fed.
IV. The most important scheduled events (time GMT 0)
Private Nonfarm Payrolls
Average hourly earnings
Labor Force Participation Rate
Baker Hughes Oil Rig Count
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