Non-Farms is a crowded trade


Friday is finally here, and with it the week’s data highlight, the US Non-Farm Payrolls. It has been a choppy week of trading across most asset classes. As the dust settles, only the commodity sector shows a clear win instead of a nil-all draw.

Markets overnight were solidly in global recovery mode, with iron ore and copper powering higher along with platinum group and precious metals. The commodity rally saw the US dollar retreat, notably versus the commodity currencies. That accelerated after robust Initial Jobless Claims data and despite more pseudo hawkish comments from Fed Governor (non-voting) Kaplan. Fellow Governors Bostic and Mesler resolutely stuck to the Fed’s dovish mantra, which dovetailed nicely with what financial markets, in buy-everything mode, wanted to hear.

Recovery expectations once again saw the cyclical Dow Jones outperform the S&P 500 and tech-heavy Nasdaq, although all three indices enjoyed a day in the sun. Not all went to plan, though; oil retreated, as did US yields which continue to confound. It may as well be Star Trek as far as bond markets go, and I have accepted that higher yield resistance is futile, for now.

Depending on who you speak to, tonight’s Non-Farm Payrolls will come in at between 1.0 million and 1.30 million jobs added. That is notably higher than the 900,000 market consensus from Monday morning. My concern is that it is starting to look like a very crowded trade, which always makes me nervous. Especially that despite the noise this week, most markets have just range traded.

The risks shift, I suspect, to a print of 900,000 or less, which will surprise markets. I caveat this by saying that that is not my base case; I am in the 1.0 million club myself. However, readers will know that I hate running with the herd. I am quite capable of running off the edge of the cliff face myself thank you.

Unpicking the price action in such a scenario is a little more complex, and I have long said that one should never trade the markets in the 30 minutes after the Non-Farms; that way lies the dark side. Given the cyclical rotation pumping up the Dow Jones, I would hazard to say the Dow Jones would fall and the Nasdaq would rise. Oil’s overnight retreat would continue. Commodities would also see profit-taking while US bond yields, which seem capped with concrete, would also move lower. Bizarrely, that will probably see the US dollar rise, notably against the outperforming commodity currencies.

How long will the reversal last? Probably not far into next week. The financial markets global recovery group-think quickly justifying a low Non-Farm Payrolls print as an “anomaly” along the path to post-Covid-19 nirvana. Still, we could be in for a frisky end of the week. You have been warned.

With global recovery price action and the Non-Farm’s dominating investors’ minds, Asia’s data has been somewhat subsumed today. Nevertheless, it contained nothing to dull the recovery narrative. South Korea’s Trade Balance modestly outperformed, coming in at USD7.82 billion. Japan’s Jibun Bank Services PMI improved to 49.5, with the street ignoring signals of extended and tightening Covid-19 restrictions in Japan.

Front and centre was China’s Caixin Services PMI, which rose strongly in April to 56.30. It indicated that the directional of travel for China’s domestic recovery continues in the right direction. It has also dampened any negative feedback on the tense geopolitical front between China, and seemingly, the rest of the entire planet this week.

China has just released its Balance of Trade which has printed at USD42.86 billion in dollar terms, well above the USD28.1 billion expected. The YoY export and import numbers have leapt massively but are slightly disingenuous, reflecting a shallow Covid-19 base in April last year. Nevertheless, the data is excellent and should be supportive, along with the Caixin PMI for regional equities today.

Germany’s Balance of Trade and pan-Europe industrial production data should tell a similar story, even if European services have suffered a Covid-19 hiccup. That should be enough to maintain the global recovery bid-tone across markets until this evening’s US data.

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