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I. Market focus
At the beginning of Monday’s session, the focus of market participants continued to be on Friday’s strong data on the U.S. labor market, as well as the comments of Fed Chairman Jerome Powell. Despite the fact the latest employment data showed an increase in unemployment rate, the number of new jobs created in the U.S. non-farm sectors turned out to be more than 70 percent higher than the average forecasts implied, and twice as many as in the previous month. Moreover, it was noted that the wage growth accelerated from 0.2 percent m-o-m in November to 0.4 percent m-o-m in December. Strong labor market data reinforced expectations of a further tightening of the Fed’s monetary policy, supporting the dollar and negatively impacting the dynamics of stock indices. But later, the comments of the Chairman of the Federal Reserve completely changed the situation. While expectedly raising the interest rates once again and improving macroeconomic forecasts in mid-December, the Fed gave an unambiguous signal that it did not intend to take market dynamics into account until it affected the real economy. Now the head of the regulator decided to correct this position, stating that the Fed is closely following the developments in the markets and it can adjust its policy at any time. Moreover, Powell noted the Fed is ready not only to revise its interest-rate policy but also to adjust the balance sheet run-off if needed. The comments provided confidence to investors and major the U.S. stock indexes posted gains between 3.3 percent and 4.3 percent. In the near future, stock indexes are likely to continue to correct after the December declines, but it’s too early to talk about a new upward trend. The fact is that despite the current optimism, trade relations between the U.S. and China remains the main concern. It has been less discussed recently, but a cut in sales outlook by Apple once again fueled interest in this issue. U.S.-China negotiations are set to be held in Beijing on Monday and Tuesday. Progress in talks, or at least a positive assessment of their results by participants, will support optimism in the markets. Otherwise, recent growth can be very quickly pared by a new wave of sales.
Monday will not be busy with macroeconomic events. The main report will be statistics on activity in the non-manufacturing sector of the U.S. economy from ISM (15:00 GMT). Attention should also be paid to the Canadian PMI index from Ivey, which will be published simultaneously with the data from ISM.
II. The market highlights are:
Statistics Canada reported on Friday that the number of employed people rose by 9,300 m-o-m (+0.05 percent m-o-m) in December, exceeding economists’ forecast for a 5,500 increase and after an unrevised record advance of 94,200 in the previous month. Meanwhile, Canada's unemployment rate was unchanged m-o-m at 5.6 percent last month. It remained the lowest jobless rate since comparable data became available in 1976. Economists had forecast the reading to increase to 5.7 percent. According to the report, full-time employment decreased by 18,900 (-0.1 percent m-o-m) in December, while part-time jobs rose 28,300 (+0.8 percent m-o-m). In December, the number of private sector employees dropped 20,000 (-0.2 percent m-o-m), while the number of public sector employees fell by 17,100 (-0.5 percent m-o-m). At the same time, the number of self-employed increased by 46,400 m-o-m (+1.6 percent m-o-m) last month. Sector-wise, there were more people working in manufacturing (+1.4 percent m-o-m), transportation and warehousing (+1.5 percent m-o-m), as well as in health care and social assistance (+0.4 percent m-o-m). At the same time, employment decreased in wholesale and retail trade (-0.9 percent m-o-m) as well as in public administration (-1.7 percent m-o-m). In the 12 months to December, employment increased by 163,000 (+0.9 percent y-o-y), entirely driven by gains in full-time work (+185,000 or +1.2 percent y-o-y).
The U.S. Labor Department announced on Friday that nonfarm payrolls increased by 312,000 in December after an upwardly revised 176,000 gain in the prior month (originally an increase of 155,000). According to the report, employment rose in health care (+50,000 jobs), food services and drinking places (+41,000), construction (+38,000), manufacturing (+32,000), and retail trade (+24,000). At the same time, the unemployment rate rose by 0.2 percentage point to 3.9 percent in December, which was the highest jobless rate since July. Economists had forecast 177,000 new jobs and the jobless rate to stay at 3.7 percent. The labor force participation rate rose to 63.1 percent in December from 62.9 percent in November, while hourly earnings for private-sector workers rose by 0.4 percent m-o-m (11 cents) to $27.48, following an unrevised 0.2 percent m-o-m gain in November. Economists had forecast a 0.3 percent m-o-m advance in the average hourly earnings. Over the year, average hourly earnings have increased by 84 cents or 3.2 percent. The average workweek edged up by 0.1 hours to 34.5 hours in December, matching economist’s’ forecast.
The U.S. Energy Information Administration (EIA) revealed on Friday that crude inventories rose only by 7,000 barrels in the week ended December 28. Economists had forecast a decrease of 3.086 million barrels. At the same time, gasoline stocks rose by 6.89 million barrels, while analysts had expected a build of 2.40 million barrels. Distillate stocks surged by 9.529 million barrels, while analysts had forecast an increase of 1.10 million barrels. Meanwhile, oil production in the U.S. was unchanged at 11.700 million barrels per day. U.S. crude oil imports averaged 7.4 million barrels per day last week, down by 264,000 barrels per day from the previous week.
The weekly report from Baker Hughes, which was released on Friday, showed that the number of active U.S. rigs drilling for oil fell by eight to 877 during the week ended January 4. In the prior week, the oil-rig count rose by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also decreased by eight to 1,075, as the gas rig count was steady at 198 last week, and the miscellaneous rig count remained at 0. The U.S. rig count is up 151 rigs from this time last year when it stood at 924.
The Australian Industry Group (AiG) announced on Sunday that its manufacturing index dropped to 49.5 in December from 51.3 in November, signaled the first mild contraction in manufacturing conditions in 26 months. A reading above 50 indicates expansion, while a reading below 50 signals a contraction in activity. That was the lowest result for the Australian manufacturing sector since August 2016. According to the report, six of the seven activity sub-indexes in the Australian PMI fell in December, indicating generally weaker conditions. The deliveries sub-index posted the biggest drop (-6.0 points to 48.4 points in December), followed by the production sub-index (-2.4 points to 49.4 points) and the sales sub-index (-2.3 points to 50.3 points). At the same time, the new orders sub-index (+0.3 points to 49.0 points in December) was the only activity indicator to improve in December.
III. Market Situation
The currency pair EUR/USD rose slightly, refreshing Friday’s high, helped by the broad weakness in the U.S. currency. In addition, investors were adjusting their positions ahead of the publication of the report on the Eurozone’s retail sales and the ISM data on the U.S. non-manufacturing PMI. Economic activity has been strong according to the ISM non-manufacturing index, which has exceeded 60 for three consecutive months. However, experts forecast the index probably ended the year on a softer note. Lower oil prices are likely to hit respondents in the mining industry, while comments from recent reports indicated some concerns about tariffs. In contrast to the ISM non-manufacturing index, regional PMIs for the service sector as well as the Markit services index have declined over the past few months. If today's data turn out to be much worse than the forecast (59.1 versus 60.7 in November), concerns about a slowdown will increase, given that the non-manufacturing index represents nearly 90% of U.S. output. However, if the index rises again, it will indicate that the economic momentum remains strong. Resistance level - $1.1484 (high of December 20, 2018). Support level - $1.1337 (low of January 3).
The currency pair GBP/USD traded higher, nearing its four-week peak. The pair was supported by the widespread decline in the U.S. dollar. With an empty economic calendar in the UK ahead, traders will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets, as well as Brexit-related news. On Wednesday, the UK’s parliament will resume debate on the Brexit agreement proposed by May. Resistance level - $1.2810 (high of December 6, 2018). Support level - $1.2616 (low of January 4).
The currency pair AUD/USD demonstrated a slight increase, as the broad weakness in the U.S. dollar pared the negative from the disappointing data out of Australia. The Australian Industry Group (AiG) announced that its manufacturing index dropped to 49.5 in December from 51.3 in November, signaled the first mild contraction in manufacturing conditions in 26 months. A reading above 50 indicates expansion, while a reading below 50 signals a contraction in activity. That was the lowest result for the Australian manufacturing sector since August 2016. According to the report, six of the seven activity sub-indexes in the Australian PMI fell in December, indicating generally weaker conditions. Resistance level - AUD0.7203 (high of December 18 and 19, 2018). Support level - AUD0.6950 (January 3).
The currency pair USD/JPY fell moderately amid a decline in the U.S. dollar. Market participants also digested the latest survey from Nikkei, which revealed Japan’s services sector continued to expand in December, albeit at a slower pace. According to the report, Japan’s services PMI came in at 51.0 last month, down from 52.3 in November. Individually, a weaker rise in new sales hampered output growth, although job creation accelerated to a three-month high and business confidence remained elevated. Nikkei also reported its composite index, which covers both manufacturing and services, slipped to of 52.0 in December from 52.4 in the previous month. Resistance level - Y111.45 (high of December 21, 2018). Support level - Y107.11 (low of January 3).
U.S. stock indexes closed solidly higher on Friday, supported by strong U.S. jobs report, expectations of U.S.-China trade talks and assurances from Federal Reserve Chairman Jerome Powell that the central bank would be patient and flexible in steering the course of interest rates. The U.S. Labor Department reported that nonfarm payrolls increased by 312,000 in December after an upwardly revised 176,000 gain in the prior month (originally an increase of 155,000). Meanwhile, the unemployment rate rose by 0.2 percentage point to 3.9 percent in December, which was the highest jobless rate since July. Economists had forecast 177,000 new jobs and the jobless rate to stay at 3.7 percent. The hourly earnings for private-sector workers rose by 0.4 percent m-o-m (11 cents) to $27.48, following an unrevised 0.2 percent m-o-m gain in November. Economists had forecast a 0.3 percent m-o-m advance in the average hourly earnings. Over the year, average hourly earnings have increased by 84 cents or 3.2 percent.
Asian stock indexes closed higher on Monday, following Friday’s rally on Wall Street. In addition, investor sentiment improved slightly ahead of fresh talks between the U.S. and China on trade.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.66% (-1 basis points)
Yields of German 10-year bonds hold at 0.21% (0 basis points)
Yields of UK 10-year gilts hold at 1.15% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded solidly higher. Crude oil for delivery in February settled at $48.74 (+1.63%). The crude oil prices surged, helped by a weaker U.S. dollar and the latest data from Baker Hughes. The data showed that the number of active U.S. rigs drilling for oil fell by eight to 877 during the week ended January 4. In the prior week, the oil-rig count rose by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also decreased by eight to 1,075, as the gas rig count was steady at 198 last week, and the miscellaneous rig count remained at 0. The U.S. rig count is up 151 rigs from this time last year when it stood at 924.
Gold traded at $1,290.30 (+0.35%). Gold prices traded higher on the back of the weakness in the U.S. currency and partial profit taking after Friday's drop. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.17 percent to 96.02. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
Foreign Currency Reserves
Sentix Investor Confidence
Ivey Purchasing Managers Index
FOMC Member Bostic Speaks
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