The spike higher on Treasury yields in recent sessions has the ability to really negatively impact on market sentiment if the move continues apace. The 10 year Treasury yield has now jumped by 15 basis points since the huge surge took off on Wednesday’s strong employment and ISM data. This turns focus squarely on today’s Non-farm Payrolls. All signs are that the US economy is firing on all cylinders now. Growth of 4.2% in Q2 seems to have run at similar levels in Q3 according to the Atlanta Fed’s GDPNow model. Survey data in the services sector from the ISM was at record levels and FOMC Powell is implying there is plenty of scope for further rate hikes. With the 10 year yield at 7 year highs there seemed to be a notable shift on bond markets this week, conceding that inflation and growth expectations need to be re-assessed. If this is now backed by strong growth numbers in the Non-farm Payrolls and strong earnings growth (which is still the final piece in the jigsaw on rising inflation expectations), then expect to see yields find traction higher again. The dollar saw perhaps a surprising unwind yesterday, but this leaves several dollar major pairs at crucial levels. If we see a strong payrolls report today, this will simply be a pullback that gives the dollar bulls another opportunity. The flip-side of that is that this spike in yields is negative for market sentiment and risk appetite, as seen on the selling pressure on Wall Street last night. Further moves higher at the pace we see currently, and the selling pressure through equities could accelerate.
Wall Street closed strongly lower yesterday with the S&P 500 -0.8% at 2901, although futures have steadied a touch today there was still selling pressure through Asian markets (Nikkei -0.7%). European indices are mixed in early moves with an eye on Non-farm Payrolls later. In forex, there is the usual consolidation forming ahead of payrolls, however, it is interesting to see that sterling is a mild outperformer following yesterday’s strong recovery. In commodities, gold and silver are consolidating whilst oil has found some support after a considerable corrective move yesterday.
The big focus for traders will be the payrolls report. After months where the market has paid little attention to a stream of jobs reports that have done little to change the outlook, this report could be a little bit more interesting. Strong ADP jobs numbers and a strong employment position in a 21 year high ISM Non-Manufacturing release has heightened expectations. The US Employment Situation is at 1330BST with the headline Non-farm Payrolls expected to be 185,000 which is a number there to be beaten now. The Average Hourly Earnings are expected to grow by +0.3% on the month however, this would be a slip back to +2.8% for the year on year data (from +2.9% last month after a strong month on month growth in August of +0.4%). Also there is an increasing interest in how Unemployment moves, and it is expected to drop further to 3.8% (from 3.9% last month) and towards the Fed’s projected 3.6% in 2018. U6 Underemployment fell to 7.4% which was positive last month but the labour force participation rate also dropped back to 62.7% and if the US labor market is so strong, a failure for this to pick up will pose some questions, so both will be worth keeping an eye on. Other than the payrolls report, there is also the US International Trade Balance for August at 1330BST which is expected to deteriorate to -$53.5bn (from -$50.1n in July).
Chart of the Day – AUD/JPY
The Aussie has come under considerable strain in recent sessions with the risk negative implications of spiking bond yields. This is reflected in a series of sell signals on Aussie/Yen which is a pair that is a good reflection of market risk appetite. This comes with the near term break below support at 81.30 on three strong bear candles. The market is now putting i