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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 179,000 jobs in December versus 155,000 jobs added in November (November’s reading will be revised twice: today and the next month);
- The average value of jobs added is 204,000 over the past 12 months. Over the past six months – 195,000. Over the past three months - 170,000;
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 271,000 jobs in December, according to the ADP report on Thursday. November’s figure was revised down to 155,000 jobs from a previous reading of 179,000. Analysts expected the private sector to add 179,000 jobs;
- The Institute for Supply Management's (ISM) manufacturing employment sub-index for the U.S. fell to 56.2 in December from 58.4 in November; the ISM’s services employment sub-index is set to be released on January 7;
- Job openings rose to 7.08 million in October from 6.96 million in the previous month;
- Average initial jobless claims for four weeks is 219,000, remaining slightly above the lowest level since the late 1960s;
- The Conference Board reported that 11.6 percent of the respondents experienced difficulties in finding a job in the last reporting month (versus 12.6 percent a month earlier). At the same time, some 46.2 percent of respondents said jobs were plentiful (versus 46.8 percent a month earlier).
Given the data available at the moment, the average forecasts for the payrolls report look rather justified. 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 accelerated to 0.3 percent m-o-m in December from 0.2 percent m-o-m in the prior month.
II. The market highlights are:
The employment report prepared by Automatic Data Processing Inc. (ADP) and Moody's Analytics showed on Thursday the U.S. private employers added 271,000 jobs in December. That was the biggest monthly jobs gain since February 2017. Economists had expected a gain of 178,000. The increase for October was revised down to 157,000 from 179,000. “We wrapped up 2018 with another month of significant growth in the labor market,“ said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Although there were increases in most sectors, the busy holiday season greatly impacted both trade and leisure and hospitality. Small businesses also experienced their strongest month of job growth all year.” Meanwhile, Mark Zandi, chief economist of Moody’s Analytics, noted, “Businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war. Favorable December weather also helped lift the job market. At the current pace of job growth, low unemployment will get even lower.”
The U.S. Labor Department reported on Thursday the number of applications for unemployment benefits rose last week, but the underlying trend continued to point to labor market strength. According to the report, the initial claims for unemployment benefits increased 10,000 to 231,000 for the week ended December 29. Economists had expected 220,000 new claims last week. Claims for the prior week were revised upwardly to 221,000 from the initial estimate of 216,000. Meanwhile, the four-week moving average of claims fell 500 to 218,750 last week.
A report from the Institute for Supply Management (ISM) revealed on Thursday the U.S. manufacturing sector expanded in December at a slower pace than in November. The ISM's index of manufacturing activity came in at 54.1 percent last month, down 5.2 percentage points from the unrevised November figure of 59.3 percent, missing economists' forecast for a 57.9 percent reading. That was the lowest reading since November 2016. 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 (-11.0 percentage points m-o-m to 51.1 percent in December), the production index (-6.3 percentage points m-o-m to 54.3 percent), the supplier deliveries index (-5.0 percentage points m-o-m to 57.5 percent) and the employment index (-2.2 percentage point m-o-m to 56.2 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 December (54.1 percent) corresponds to a 3.4-percent increase in real gross domestic product (GDP) on an annualized basis.”
Final data released by IHS Markit showed on Friday that activity growth in Japan’s manufacturing sector continued to expand in December and at a faster rate. The Nikkei Japan Manufacturing purchasing manager's index (PMI) came in at 52.6 last month, compared to a preliminary reading of 52.4 and a final reading of 52.2 in November, which was the lowest level in 15 months. Economists had expected the reading to remain unrevised at 52.4. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. According to the report, output expanded at its sharpest pace since last April, and new orders also increased at a faster pace, but overall remained relatively muted. Hampering the overall increase in the PMI was a softer rise in employment. The rate of job creation was the weakest in three months and only modest. On the price front, there was a broad cooling of inflationary pressures. Input costs rose sharply, but at the softest pace in eight months. Business confidence slid to the lowest in just over two years amid concerns towards the impending consumption tax hike.
Markit/Caixin’s survey revealed on Friday that the activity growth in the Chinese services sector rose in December. The Caixin/Markit services purchasing managers' index (PMI) came in at 53.9 last month on a seasonally adjusted basis, up from the previous month's reading of 53.8. Economists’ had predicted the reading to fall to 52.9. The 50 mark divides contraction and expansion. According to the survey, the new orders increased modestly at services companies, while new work from abroad expanded at the quickest pace for six months and employment increased slightly. On the price front, operating expenses continued to increase solidly across the service sector, with many firms linking the rise to higher raw material prices and salary costs. Caixin China Composite PMI, which covers both manufacturing and services, rose from 51.9 in November to a five-month high of 52.2 in December.
III. Market Situation
The currency pair EUR/USD traded near the opening level, due to the stabilization of the U.S. dollar. In addition, investors were cautious ahead of the publication of inflation data for the Eurozone and a report on the U.S. labor market, as well as prepared for the speech of Fed Chairman Jerome Powell. Inflationary pressure in the Eurozone remains moderate. In November, the consumer price index rose by 1.9 percent y-o-y, while the figure exceeded 2 percent in previous months, helped by rising energy prices and, to a lesser extent, food prices. Nevertheless, the core inflationary pressure has so far remained relatively subdued: inflation in the services sector was 1.3 percent y-o-y in November, while the core consumer price index rose by only 1.0 percent y-o-y. In December, the consumer price index should continue to indicate a slight inflationary pressure. Given the recent fall in oil prices, it is expected that the overall consumer price index slowed to 1.8 percent y-o-y. At the same time, core inflation, which has fluctuated between 0.9 percent y-o-y and 1.1 percent y-o-y since May, is forecast to remain in this range in December, recording an increase of 1.0 percent y-o-y. Resistance level - $1.1484 (high of December 20, 2018). Support level - $1.1337 (low of January 3).
The currency pair GBP/USD consolidated near the opening level, due to the lack of new catalysts that can set the direction of movement, and investors' reluctance to open large positions ahead of the release of British data on activity in the services sector and the U.S. employment report. According to economist’ forecast, the UK’s services PMI rose to 50.7 points in December from 50.4 points in November. Apart from the data, traders will also focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets, as well as Brexit-related news. Resistance level - $1.2705 (high of December 18, 20 and 28, 2018). Support level - $1.2478 (low of December 12, 2018).
The currency pair AUD/USD rose slightly, consolidating above the psychological level of 0.7000. The pair was supported by favorable data from China (Australia's main trading partner) and higher commodity prices. Markit/Caixin’s survey revealed that the activity growth in the Chinese services sector rose in December. The Caixin/Markit services purchasing managers' index (PMI) came in at 53.9 last month on a seasonally adjusted basis, up from the previous month's reading of 53.8. Economists’ had predicted the reading to fall to 52.9. The 50 mark divides contraction and expansion. Caixin China Composite PMI, which covers both manufacturing and services, rose from 51.9 in November to a five-month high of 52.2 in December. Resistance level - AUD0.7077 (high of December 27, 2018). Support level - AUD0.6900 (psychological level).
The currency pair USD/JPY demonstrated a moderate increase, helped by partial profit taking after the recent drop, as well as statements of Japan's vice finance minister for international affairs Masatsugu Asakawa, who noted that Ministry of Finance would respond to wild swings in currency markets if needed. “We’ve seen currency moves with extremely high volatility. I am worried,” he said. Asakawa added that Group of 7 and Group of 20 countries have confirmed that cooperation on managing volatility in currency markets was possible if circumstances demanded it. He also noted that a "narrowing of the spread between Japanese and U.S. interest rates is one of the factors that have caused the yen's sharp appreciation." Resistance level - Y111.45 (high of December 21, 2018). Support level - Y107.11 (low of January 3).
U.S. stock indexes closed sharply lower on Thursday, as a weak manufacturing data and a cut in sales outlook by Apple Inc. (AAPL; -10%) stoked worries about a slowdown in global economic growth. A report from the Institute for Supply Management (ISM) revealed on Thursday the U.S. manufacturing sector expanded in December at a slower pace than in November. The ISM's index of manufacturing activity came in at 54.1 percent last month, down 5.2 percentage points from the unrevised November figure of 59.3 percent, missing economists' forecast for a 57.9 percent reading. That was the lowest reading since November 2016. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction.
Asian stock indexes closed mixed on Friday, following overnight weakness on Wall Street. The Chinese markets rose, supported by positive data from China's services sector and the announcement by the country's commerce ministry that vice ministerial-level trade negotiations with the U.S. would be held on January 7-8. Markit/Caixin’s survey revealed that the activity growth in the Chinese services sector rose in December. The Caixin/Markit services purchasing managers' index (PMI) came in at 53.9 last month on a seasonally adjusted basis, up from the previous month's reading of 53.8. Economists’ had predicted the reading to fall to 52.9. Meanwhile, Caixin China Composite PMI, which covers both manufacturing and services, rose from 51.9 in November to a five-month high of 52.2 in December.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.58% (+2 basis points)
Yields of German 10-year bonds hold at 0.16% (0 basis points)
Yields of UK 10-year gilts hold at 1.07% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded solidly higher. Crude oil for delivery in February settled at $47.64 (+1.17%). The crude oil prices surged, helped by the latest data from the American Petroleum Institute (API). The API reported that U.S. crude supplies fell by 4.5 million barrels for the week ended December 28. At the same time, gasoline stockpiles increased by 8 million barrels, while distillate inventories rose by 4 million barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA), set to be released at 16:00 GMT.
Gold traded at $1,293.80 (-0.02%). Gold prices traded little changed on the back of the stabilization of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, edged up 0.03 percent to 96.33.
IV. The most important scheduled events (time GMT 0)
Unemployment Rate s.a.
Net Lending to Individuals
Purchasing Manager Index Services
Producer Price Index
Industrial Product Price Index
Private Nonfarm Payrolls
Labor Force Participation Rate
Average hourly earnings
Fed Chair Powell Speaks
Crude Oil Inventories
Baker Hughes Oil Rig Count
FOMC Member James Bullard Speaks
Fed Barkin Speech
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