Asian stock markets are broadly lower

8 July, 2016

FX News Today

European Outlook: Asian stock markets are broadly lower, following on from a weak close on Wall Street as a slump in oil prices in the wake of the EIA inventory report hit confidence. Prices are up from lows, but the front end WTI future is still below USD 46 per barrel and U.S. and U.K. stock futures signal further pressure on equity markets. This should see Bund and Gilt futures recover some of yesterday’s losses going into today’s U.S. jobs report where we expect a bounce in payroll growth to between 160k and 210K (median 178K).  Brexit and Italian bank problems remain the focus in Europe. U.K. consumer confidence plunged sharply following the Brexit referendum, according to GfK data, which saw the core index plunging to -90 in a survey conducted June 30-July 5, from -1 ahead of the referendum. Still to come Germany and the U.K. publish trade data for May and France has production numbers.

US Data Reports: Signaled a tightening labor market as we approach today’s jobs report where we expect a bounce in payroll growth. We saw a 16k initial claims drop to a lean 254k in the first week of July that sits barely above the 42-year low of 248k from the April BLS survey week, and we expect a similarly lean July BLS survey week reading after an assumed bounce next week to 265k, given our read of the auto retooling distortions. We also saw a firm 172k June ADP rise, even though these figures didn’t benefit from the 35k Verizon strike reversal that will lift payrolls, and the as-reported ADP figures have run 18k per month weaker than private payrolls since 2012.

Brexit Aftermath: Think tank NIESR said UK GDP went negative in June after stagnating in May, though a strong April carried an overall estimated growth of +0.6% in Q2. The group stated that “when April drops out of the three-month calculation we should see a quick deterioration of growth, especially if the estimated contraction in June persists or accelerates in July or beyond.” All the signs suggest that activity is diminishing at an accelerated rate since the June 23 referendum. Timely surveys by YouGov CEBR found both business and consumer confidence have dropped sharply since the Brexit vote. There have been bright spots, however, with exporters such as Burberry, a high-end fashion retailer, likely to benefit from the weaker pound, while a trade deal with India may happen within a year (a deal between the EU and India has been held for years by the former’s concerns about wine and car trade). The good news stories so far don’t look likely to offset the possibility that the UK ends up with a net worse trade deal with the EU.

Canada’s Ivey PMI improved: It registered 51.7 in June up from 49.4 in May. The prices index fell to 59.7 in June from 63.1. The pull-back in May left the Ivey at the weakest level of the year, and was below the most recent foray into contractionary (sub-50) territory in December of 2015 that saw the index fall to 49.9. The decline in May was not shocking given the Fort McMurray fires during the month, and the concerns about the outlook for the region and the impact of stopped oil production on the national economy. The move back above 50 in June is consistent with some improvement in activity during the month as a whole, although wildfire disruptions persisted early in the month.

Main Macro Events Today        

US Nonfarm payrolls   June employment data is out today and could reveal a possible 210k (median 178k) headline after last months disappointing 38k and only 123k in April. We expect the unemployment rate to remain steady at 4.7% for a second month. The balance of risk is firmly to the upside.

Japan’s policy Troika The MoF, FSA and BoJ will meet today to discuss the financial markets post-Brexit and concurrent strength of the yen that could relegate Japan’s economy back into recession, according to a Reuters report. Former Fed Chairman Bernanke will be meeting next week with PM Abe and BoJ’s Kuroda, no doubt to discuss helicopter maintenance and NIRP: “The meetings underscore the concern government officials have about damage that the recent market rout, triggered by the Brexit vote, could inflict on Japan’s fragile economic recovery. The last time they met was on June 25, shortly after Britain voted to leave the European Union, a decision that jolted financial markets and boosted investors’ demand for the safe-haven yen JPY. Bernanke is expected to discuss Brexit and the BOJ’s negative interest rate policy with Abe and Kuroda, the official said. The BOJ governor has repeatedly denied that the BOJ would adopt such a policy (helicopter money), however, saying it is as an ‘impossible’ option under current law separating the government’s role in fiscal policy from the BOJ’s in monetary policy.”

Canada Employment  We expect employment, also due today, to rise 10.0k in June after the 13.8k gain in May. May saw a strong boost from Census hiring (public admin +19.4k), which should unwind in June. And the wildfires persisted into June, which could trim resource and related jobs. But the May report had a surprisingly firm tone even when the temporary factors are accounted for, suggesting the job market was resilient, which could have carried into June. We expect the unemployment rate to tick higher to 7.0% in June from 6.9% in April that came on the heels of back to back 7.1% readings in March and April. Hours worked are expected to nudge 0.1% higher (m/m) in June after the 0.2% gain in May.

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