Sive Morten
Special Consultant to the FPA
- Messages
- 18,739
Fundamentals
No doubts, guys that NFP report outshines everything else on this week. It has made a stunning result on the market, the bomb effect. This is a kind of moment, when you see from long-term view that something of this kind has to happen but you do not see the source, where it could come from. Because nobody expected so poor numbers especially when we've got great sales, GBP, consumption, sentiment and even inflation data in last 2-3 weeks. But this surprise stands in a row with our long-term view and leads as DXY as EUR one step closer to the major target.
Market overview
The dollar fell to its lowest in more than two months on Friday after U.S. jobs data for April came in well below expectations, putting a damper on hopes that a roaring economic recovery would spur higher rates and light a fire under the greenback.
Nonfarm payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department said in its closely watched employment report. Economists polled by Reuters had forecast a rise of 978,000 jobs.
"The number was so out of consensus, that I think the market expectation of super-high rates and a squeeze on inflation is going to go down by the wayside, and that obviously means more liquidity from the Fed," said Boris Schlossberg, managing director of FX strategy at BK Asset Management. It also means U.S. interest rates will stay at ultra-low levels for quite a while and that is going to keep the pressure on the dollar, Schlossberg added.
"This is only one report, but this is changing many traders' thinking on how this recovery is unfolding," said Edward Moya, senior market analyst at FX broker OANDA, in New York.
SAMEER SAMANA, SENIOR GLOBAL MARKET STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE, ST LOUIS:
“Job growth came in well below expectations, and below the 3- and 6-month averages, showing that the labor market recovery may be uneven at times.”
“Still, it was positive and the internals (hours worked, the participation rates, and wage growth all were better than expected) suggest things continue to improve.”
“We would not read too much into any one jobs report and continue to think the labor market remains on track and will be more than enough to underpin consumer confidence and consumption.”
“We also think the investing backdrop remains positive and investors should favor stocks over bonds, and cyclicals/growth over defensives.”
While the U.S. economy has been gaining steam on the back of massive government stimulus and an improving health situation, Federal Reserve speakers on Wednesday downplayed the risks of higher inflation.
"The outlook for the dollar by many right now that it’s going to be in the house of pain for quite some time," because for the most part, the markets are convinced that the Fed has Treasury yields under control, said Edward Moya, senior market analyst at FX broker OANDA in New York.
"The employment gain is understated in part because of the generous largess from Washington," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. "Short-staffed restaurant owners are working overtime, truck drivers are impossible to find even after a hefty increase in hourly wages and loading docks at warehouses are keeping trucks idle as there aren't enough workers."
"We have warned frequently that the COVID-19 shock last spring would echo through the seasonally adjusted data and cause significant volatility," said Scott Ruesterholz, portfolio manager at Insight Investment in New York. "That is likely what is happening with this report."
The report did not change expectations that the economy entered the second quarter with strong momentum and was on track for its best performance this year in almost four decades. Timely labor market indicators, like new claims for jobless benefits, which last week dropped below 500,000 for the first time since the pandemic started, suggest payrolls will pick up.
Elsewhere, the Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain's economic growth this year after its coronavirus slump, but it stressed it was not tightening monetary policy.
"They said they are going to reduce the weekly pace of purchases, but that's not a signal and so sterling has kind of gone up and down and done nothing at the end of the day," said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.
As we've mentioned in last two weeks Investors were also paying attention to elections in Scotland that could herald a political showdown over a new independence referendum. read more
President Joe Biden reacted on Friday to a disappointing April jobs report by saying the U.S. economy has a “long way to go” before recovering from its pandemic slump, and he urged Washington to do more to help the American people. Biden and his team have said his $1.9 trillion pandemic relief package, the Democratic president’s first major legislative accomplishment, is helping to bring the economy back from its pandemic plummet, and they are pushing for another $4 trillion in new investments.
“Today’s report just underscores in my view how vital the actions we’re taking are,” Biden said in remarks at the White House. “Our efforts are starting to work. But the climb is steep and we still have a long way to go.”
The jobs report highlighted an intractable political divide in Washington over government spending. Republicans and business groups blasted generous unemployment benefits in the relief package, contending they were stopping lower-wage Americans from going back to work. Critics object to the high price tag of Biden’s plans and warn they could bring inflation. Biden said he did not believe government benefits were hindering a return to work, and his economists backed him up.
“It’s clear that there are people who are not ready and able to go back into the labor force,” Treasury Secretary Janet Yellen told reporters, citing parents whose children are still learning remotely. “I don’t think the addition to unemployment compensation is really the factor that is making a difference.”
Jared Bernstein, a member of the president’s Council of Economic Advisers, told Reuters that Biden’s COVID relief and stimulus, known as the American Rescue Plan, had helped generate an average of more than half a million jobs per month, April not withstanding.
The 266,000 jobs that U.S. firms added in April were “nowhere near” what was expected, a Federal Reserve official said Friday, and added little to the “substantial further progress” officials want to see before considering changes to monetary policy.
Barkin said he thought the results were largely driven by labor supply issues and “frictional” barriers to employment such as mismatches between available workers and job skills, and workers still facing child care and other constraints. Many, he said, flush with savings and with enhanced unemployment benefits still available, have the “wherewithal” to wait to return to work and may be doing so.
Still, it gives Fed policymakers little reason to do anything but keep the monetary policy tap wide open until the economy is on a clearer path back to full employment.
“This puts less pressure on the Fed to prematurely talk about tapering. They wanted to be patient and hold off on it,” said Larry Adam, chief investment officer at Raymond James in Baltimore, Maryland, in reference to the process of reducing the $120 billion in monthly bond purchases the Fed currently makes to help hold down long-term interest rates that influence family and business spending decisions.
The Fed in December said it would not consider changing its bond purchases until there had been “substantial further progress” in reaching its full employment and 2% inflation goals.
Fed Chair Jerome Powell has said he wants to see a “string” of strong monthly job reports before opening debate on when and how fast to reduce the support provided to the economy through the coronavirus recession, including the bond purchases and the promise of near zero interest rates for years to come.
After the report, interest rate futures traders slashed bets the Fed will start raising rates next year, and the yield on the 10-year Treasury note fell to a two-month low, suggesting the market was more concerned with slowing job growth than inflation pressures. The bulk of U.S. central bankers see waiting until 2024 before lifting rates for the first time since slashing the Fed’s policy rate to near zero in March last year.
U.S. Treasury Secretary Janet Yellen said on Friday the nation could exhaust its ability to borrow this summer even if Treasury takes “extraordinary actions” to buy more time when the nation’s debt ceiling comes back into effect at the end of July.
Yellen told reporters at the White House that while the Treasury could extend its ability to borrow by employing special measures if Congress did not act to raise the debt ceiling, those steps might buy only a “very limited” amount of time.
“It is exceptionally challenging this time to try to figure out just how long those (extraordinary) measures are going to last in part because of higher and more volatile spending and revenue numbers associated with the state of the economy and the pandemic,” she said.
“We are concerned that there are scenarios that give (a) very limited amount of additional time to use extraordinary measures,” Yellen added. “There are scenarios in which some time during the summer” room would run out even after special measures were employed, she said.
COT Report
CFTC numbers are moderately positive this week, even without last changes from NFP release. Pre-NFP data shows minor increasing of net long position and open interest. Hedgers were closing hedge positions against EUR downside action. Thus, NFP impact probably should be significant and we will see it on next report. Meantime COT data confirms existing of bullish sentiment on the market.
Next week to watch
#1
After weeks of COVID-19 lockdowns, a reopening of European economies is close, and boosting sentiment. Tuesday's German ZEW sentiment survey could confirm a brightening outlook.
Germany might ease curbs on those fully vaccinated or recovered from COVID-19 as early as the weekend. France starts relaxing a night curfew and allowing restaurants to offer outside service from May 19.
After a slow start, the EU is expected to meet its target of delivering first vaccine doses to 70% of adults by end-summer, the euro zone should get to 50% in June. That’s good news for tourism-dependent economies. Brussels’ recommendation to ease restrictions on some countries and travellers is putting a spring in the step of British airline stocks too.
#2
Investors will watch the U.S. Treasury’s debt auctions for signs that demand remains steady after a yield surge roiled markets in the first quarter and fanned concerns that higher borrowing costs could hurt stocks, particularly growth sectors like technology.
The Treasury will auction $58 billion of three-year notes on Tuesday and $41 billion of 10-year notes on Wednesday, followed by $27 billion of 30-year bonds on Thursday. The Federal Reserve's asset purchase schedule too is due on May 13. The Fed kept Treasury purchases unchanged at $80 billion per month for mid-April to mid-May period.
So, despite a lot of noise around recent report we would like to say few things that somehow appeared to be outside of mainstream discussion. First is, we have negative data only in direct numbers, while such numbers as wage inflation (hourly earnings), unemployment and participation rate have shown better than expected performance. It means that current pullback in NFP is normal retracement as it can't just run without any breath taking. Some economists, mentioned above also talked about it.
Second - it is clear overestimation of NFP effect on the market. I suppose that getting new great report could change sentiment at 180 degrees again. Besides, NFP doesn't correlated with other statistics that mostly looks positive. So, by taking all these stuff together, it seems that recent reports mostly looks like "statistic error" or some out number.
At the same time, it perfectly fits to our long-term view on Dollar Index. Absolutely unexpectedly we've got the driving factor that leads our long-term expectation to the target. In fact, we've got the help where we haven't expected it. The more careful investors view on longer-term perspective is helpful to our scenario right now as it gives more chances to complete DXY 87.40 target. Under impact of this stunning report upside action EUR and downside action DXY should continue. This is the major thing that is important right now, and we keep going with our trading plan.
Technicals
Monthly
Market shows great performance in recent two months. As we said last week EUR supposedly has 2-4 bars on monthly chart to hit major upside 1.2860 target.
Still, we suspect that an exceptional event exists that could let EUR to extend this time. This is more aggressive ECB rhetoric in June. Above we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its mantras, and probably it will, as we see by recent NFP report.
As we've said earlier, despite that market has come very close to 1.16 vital area - EUR was able to stay above it and shows perfect recovery. MACD trend stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.
Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.
Weekly
Last week we have few concerns, as you remember that put the shadow on bullish scenario, but now all of them have been resolved - grabber is cancelled, potential H&S is destroyed as price jumps significantly above 5/8 Fib level where the top of right arm should be. Besides, we have strong acceleration that is not typical for H&S pattern.
Market is not at overbought, so it could keep moving higher. Recent action lets us to set new upside targets, that we do below. But, here on weekly chart we have divergence that suggests taking out of previous top around 1.2350. "Three white soldiers" also relatively rare and strong pattern that usually appears in the beginning of extended upward action.
Daily
Consequently as price was able to stay above key 1.1950 Fib support area and shows fast acceleration suggests that we're in extension mode. Due to recent action we could make few changes in our trading plan. First is, we do not need to focus on the whole upside action and keep in focus only the recent thrust from 1.1950. Real bullish market should not show reversal swings and drop below major support area.
Speaking on upside target OP stands around 1.2435 but it is too far now for daily chart. Thus, we could focus first on 0.618 COP extension around 1.2260 - this is our major target for coming week.
Intraday
Unfortunately there were not many chances to buy EUR last week as it was just single more or less acceptable retracement. Action stands very fast. At the same time this is good moment as well, because thrust is suitable for DiNapoli patterns. For instance, retracement to 1.21 K-area gives us nice B&B "Buy" pattern.
On 1H chart market hits local OP so, may be some pullback happens indeed. The "large" H&S of last week has worked, but as you can see the right arm was very fast and small.
No doubts, guys that NFP report outshines everything else on this week. It has made a stunning result on the market, the bomb effect. This is a kind of moment, when you see from long-term view that something of this kind has to happen but you do not see the source, where it could come from. Because nobody expected so poor numbers especially when we've got great sales, GBP, consumption, sentiment and even inflation data in last 2-3 weeks. But this surprise stands in a row with our long-term view and leads as DXY as EUR one step closer to the major target.
Market overview
The dollar fell to its lowest in more than two months on Friday after U.S. jobs data for April came in well below expectations, putting a damper on hopes that a roaring economic recovery would spur higher rates and light a fire under the greenback.
Nonfarm payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department said in its closely watched employment report. Economists polled by Reuters had forecast a rise of 978,000 jobs.
"The number was so out of consensus, that I think the market expectation of super-high rates and a squeeze on inflation is going to go down by the wayside, and that obviously means more liquidity from the Fed," said Boris Schlossberg, managing director of FX strategy at BK Asset Management. It also means U.S. interest rates will stay at ultra-low levels for quite a while and that is going to keep the pressure on the dollar, Schlossberg added.
"This is only one report, but this is changing many traders' thinking on how this recovery is unfolding," said Edward Moya, senior market analyst at FX broker OANDA, in New York.
SAMEER SAMANA, SENIOR GLOBAL MARKET STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE, ST LOUIS:
“Job growth came in well below expectations, and below the 3- and 6-month averages, showing that the labor market recovery may be uneven at times.”
“Still, it was positive and the internals (hours worked, the participation rates, and wage growth all were better than expected) suggest things continue to improve.”
“We would not read too much into any one jobs report and continue to think the labor market remains on track and will be more than enough to underpin consumer confidence and consumption.”
“We also think the investing backdrop remains positive and investors should favor stocks over bonds, and cyclicals/growth over defensives.”
While the U.S. economy has been gaining steam on the back of massive government stimulus and an improving health situation, Federal Reserve speakers on Wednesday downplayed the risks of higher inflation.
"The outlook for the dollar by many right now that it’s going to be in the house of pain for quite some time," because for the most part, the markets are convinced that the Fed has Treasury yields under control, said Edward Moya, senior market analyst at FX broker OANDA in New York.
"The employment gain is understated in part because of the generous largess from Washington," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. "Short-staffed restaurant owners are working overtime, truck drivers are impossible to find even after a hefty increase in hourly wages and loading docks at warehouses are keeping trucks idle as there aren't enough workers."
"We have warned frequently that the COVID-19 shock last spring would echo through the seasonally adjusted data and cause significant volatility," said Scott Ruesterholz, portfolio manager at Insight Investment in New York. "That is likely what is happening with this report."
The report did not change expectations that the economy entered the second quarter with strong momentum and was on track for its best performance this year in almost four decades. Timely labor market indicators, like new claims for jobless benefits, which last week dropped below 500,000 for the first time since the pandemic started, suggest payrolls will pick up.
Elsewhere, the Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain's economic growth this year after its coronavirus slump, but it stressed it was not tightening monetary policy.
"They said they are going to reduce the weekly pace of purchases, but that's not a signal and so sterling has kind of gone up and down and done nothing at the end of the day," said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.
As we've mentioned in last two weeks Investors were also paying attention to elections in Scotland that could herald a political showdown over a new independence referendum. read more
President Joe Biden reacted on Friday to a disappointing April jobs report by saying the U.S. economy has a “long way to go” before recovering from its pandemic slump, and he urged Washington to do more to help the American people. Biden and his team have said his $1.9 trillion pandemic relief package, the Democratic president’s first major legislative accomplishment, is helping to bring the economy back from its pandemic plummet, and they are pushing for another $4 trillion in new investments.
“Today’s report just underscores in my view how vital the actions we’re taking are,” Biden said in remarks at the White House. “Our efforts are starting to work. But the climb is steep and we still have a long way to go.”
The jobs report highlighted an intractable political divide in Washington over government spending. Republicans and business groups blasted generous unemployment benefits in the relief package, contending they were stopping lower-wage Americans from going back to work. Critics object to the high price tag of Biden’s plans and warn they could bring inflation. Biden said he did not believe government benefits were hindering a return to work, and his economists backed him up.
“It’s clear that there are people who are not ready and able to go back into the labor force,” Treasury Secretary Janet Yellen told reporters, citing parents whose children are still learning remotely. “I don’t think the addition to unemployment compensation is really the factor that is making a difference.”
Jared Bernstein, a member of the president’s Council of Economic Advisers, told Reuters that Biden’s COVID relief and stimulus, known as the American Rescue Plan, had helped generate an average of more than half a million jobs per month, April not withstanding.
The 266,000 jobs that U.S. firms added in April were “nowhere near” what was expected, a Federal Reserve official said Friday, and added little to the “substantial further progress” officials want to see before considering changes to monetary policy.
Barkin said he thought the results were largely driven by labor supply issues and “frictional” barriers to employment such as mismatches between available workers and job skills, and workers still facing child care and other constraints. Many, he said, flush with savings and with enhanced unemployment benefits still available, have the “wherewithal” to wait to return to work and may be doing so.
Still, it gives Fed policymakers little reason to do anything but keep the monetary policy tap wide open until the economy is on a clearer path back to full employment.
“This puts less pressure on the Fed to prematurely talk about tapering. They wanted to be patient and hold off on it,” said Larry Adam, chief investment officer at Raymond James in Baltimore, Maryland, in reference to the process of reducing the $120 billion in monthly bond purchases the Fed currently makes to help hold down long-term interest rates that influence family and business spending decisions.
The Fed in December said it would not consider changing its bond purchases until there had been “substantial further progress” in reaching its full employment and 2% inflation goals.
Fed Chair Jerome Powell has said he wants to see a “string” of strong monthly job reports before opening debate on when and how fast to reduce the support provided to the economy through the coronavirus recession, including the bond purchases and the promise of near zero interest rates for years to come.
After the report, interest rate futures traders slashed bets the Fed will start raising rates next year, and the yield on the 10-year Treasury note fell to a two-month low, suggesting the market was more concerned with slowing job growth than inflation pressures. The bulk of U.S. central bankers see waiting until 2024 before lifting rates for the first time since slashing the Fed’s policy rate to near zero in March last year.
U.S. Treasury Secretary Janet Yellen said on Friday the nation could exhaust its ability to borrow this summer even if Treasury takes “extraordinary actions” to buy more time when the nation’s debt ceiling comes back into effect at the end of July.
Yellen told reporters at the White House that while the Treasury could extend its ability to borrow by employing special measures if Congress did not act to raise the debt ceiling, those steps might buy only a “very limited” amount of time.
“It is exceptionally challenging this time to try to figure out just how long those (extraordinary) measures are going to last in part because of higher and more volatile spending and revenue numbers associated with the state of the economy and the pandemic,” she said.
“We are concerned that there are scenarios that give (a) very limited amount of additional time to use extraordinary measures,” Yellen added. “There are scenarios in which some time during the summer” room would run out even after special measures were employed, she said.
COT Report
CFTC numbers are moderately positive this week, even without last changes from NFP release. Pre-NFP data shows minor increasing of net long position and open interest. Hedgers were closing hedge positions against EUR downside action. Thus, NFP impact probably should be significant and we will see it on next report. Meantime COT data confirms existing of bullish sentiment on the market.
Next week to watch
#1
After weeks of COVID-19 lockdowns, a reopening of European economies is close, and boosting sentiment. Tuesday's German ZEW sentiment survey could confirm a brightening outlook.
Germany might ease curbs on those fully vaccinated or recovered from COVID-19 as early as the weekend. France starts relaxing a night curfew and allowing restaurants to offer outside service from May 19.
After a slow start, the EU is expected to meet its target of delivering first vaccine doses to 70% of adults by end-summer, the euro zone should get to 50% in June. That’s good news for tourism-dependent economies. Brussels’ recommendation to ease restrictions on some countries and travellers is putting a spring in the step of British airline stocks too.
#2
Investors will watch the U.S. Treasury’s debt auctions for signs that demand remains steady after a yield surge roiled markets in the first quarter and fanned concerns that higher borrowing costs could hurt stocks, particularly growth sectors like technology.
The Treasury will auction $58 billion of three-year notes on Tuesday and $41 billion of 10-year notes on Wednesday, followed by $27 billion of 30-year bonds on Thursday. The Federal Reserve's asset purchase schedule too is due on May 13. The Fed kept Treasury purchases unchanged at $80 billion per month for mid-April to mid-May period.
So, despite a lot of noise around recent report we would like to say few things that somehow appeared to be outside of mainstream discussion. First is, we have negative data only in direct numbers, while such numbers as wage inflation (hourly earnings), unemployment and participation rate have shown better than expected performance. It means that current pullback in NFP is normal retracement as it can't just run without any breath taking. Some economists, mentioned above also talked about it.
Second - it is clear overestimation of NFP effect on the market. I suppose that getting new great report could change sentiment at 180 degrees again. Besides, NFP doesn't correlated with other statistics that mostly looks positive. So, by taking all these stuff together, it seems that recent reports mostly looks like "statistic error" or some out number.
At the same time, it perfectly fits to our long-term view on Dollar Index. Absolutely unexpectedly we've got the driving factor that leads our long-term expectation to the target. In fact, we've got the help where we haven't expected it. The more careful investors view on longer-term perspective is helpful to our scenario right now as it gives more chances to complete DXY 87.40 target. Under impact of this stunning report upside action EUR and downside action DXY should continue. This is the major thing that is important right now, and we keep going with our trading plan.
Technicals
Monthly
Market shows great performance in recent two months. As we said last week EUR supposedly has 2-4 bars on monthly chart to hit major upside 1.2860 target.
Still, we suspect that an exceptional event exists that could let EUR to extend this time. This is more aggressive ECB rhetoric in June. Above we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its mantras, and probably it will, as we see by recent NFP report.
As we've said earlier, despite that market has come very close to 1.16 vital area - EUR was able to stay above it and shows perfect recovery. MACD trend stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.
Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.
Weekly
Last week we have few concerns, as you remember that put the shadow on bullish scenario, but now all of them have been resolved - grabber is cancelled, potential H&S is destroyed as price jumps significantly above 5/8 Fib level where the top of right arm should be. Besides, we have strong acceleration that is not typical for H&S pattern.
Market is not at overbought, so it could keep moving higher. Recent action lets us to set new upside targets, that we do below. But, here on weekly chart we have divergence that suggests taking out of previous top around 1.2350. "Three white soldiers" also relatively rare and strong pattern that usually appears in the beginning of extended upward action.
Daily
Consequently as price was able to stay above key 1.1950 Fib support area and shows fast acceleration suggests that we're in extension mode. Due to recent action we could make few changes in our trading plan. First is, we do not need to focus on the whole upside action and keep in focus only the recent thrust from 1.1950. Real bullish market should not show reversal swings and drop below major support area.
Speaking on upside target OP stands around 1.2435 but it is too far now for daily chart. Thus, we could focus first on 0.618 COP extension around 1.2260 - this is our major target for coming week.
Intraday
Unfortunately there were not many chances to buy EUR last week as it was just single more or less acceptable retracement. Action stands very fast. At the same time this is good moment as well, because thrust is suitable for DiNapoli patterns. For instance, retracement to 1.21 K-area gives us nice B&B "Buy" pattern.
On 1H chart market hits local OP so, may be some pullback happens indeed. The "large" H&S of last week has worked, but as you can see the right arm was very fast and small.