Well, the US Nonfarm Payrolls finally pulled itself out of a rut on Friday, printing well above forecasts at 531,000 jobs added while adding an upward 235,000 revision to the back months. The high-frequency NFIB survey showed a high proportion of small businesses intend to raise worker compensation. Workforce participation held steady at 61.60%, once again suggesting that the post-pandemic workforce in the US is now quite a bit smaller than it was pre-pandemic. Finally, the US House of Representatives passed the US infrastructure bill unlocking $1.2 trillion of new spending.
So, there are plenty of reasons to be a little nervous about the Fed's transitory inflation narrative. Maybe lighten up on some equities, sell a few bonds and buy some US dollars. Wrong! With the employment gains broadly based across sectors, equities rose as economic recovery sentiment won out. Another day, another record close for Wall Street. US yields edged lower, and the US dollar gave back a few of its recent gains. US capital markets only want to hear one story at the moment as that's what suits its buy-everything narrative. That's an economic recovery reinforced by total belief in Jerome Powell's promises that post-the-Fed-taper interest rates hikes will not be on the horizon.
Another reason to be upbeat, and I should have been paying more attention to sooner, is logistics and freight costs, one of the main gremlins in the inflation story. The Baltic Exchange Dry Index has plunged 5,650 and 2,710 in the past six weeks, and it is not alone. China has also raised domestic coal production to multi-year highs, taking the heat (sic) of the energy crunch for now. Iron ore and Copper have taken a beating since mid-October. Eventually, both may feed into easier inflation, although with international air travel ramping up, so will jet fuel demand. Over the weekend, Saudi Arabia hiked December crude prices to Asian customers, sending oil higher this morning.
Whichever way you cut the cake, my outlook for markets was completely wrong. I underestimated the myopic momentum to keep the asset price inflation party going. Although I'm confident the inflation piper will play, I've long ago learnt not to fight market sentiment. My favorite quote, known to long-time readers, is "markets can remain irrational, longer than you can stay solvent." I could probably add, "especially when central banks are idiotically QE'ing into an inflationary environment in their quest to make the world as economically unequal as possible to give the world even greater problems, but after they have retired on their final salary pension." Sometimes a plan doesn't come together, and that's ok; the FOMO buy-everything gnomes will have another week in the sun this week.
Over the weekend, China's October Trade Balance surged to an all-time high of $84.54 billion, as exports surged by 27.10% as it rushed to fill the Western Worlds Christmas orders, while Imports rose by only 20.60%, well below the 25.0% forecast. Logistical constraints appear to have hampered the import side of the equation, and with COVID-19 popping up more widely on the mainland, there are risks here, especially if it hits ports and factories in crucial areas. China's energy crunch and subsequent limits on raw material processing may have impacted imports and demand reduction. The pre-holiday season peak may also mark the trade balance peak.
Reuters reports that some offshore bondholders have not received payments from Scenery Journey, a unit of Evergrande (HK:3333), due to make payments over the weekend. Evergrande has some grace period deadlines this week, and as a whole, China developers have over $1.0 billion of offshore payments due this week. Watch this space. The rise in oil prices this morning, China property-sector nerves, the four-day Communist Party Central Committee, which is likely to rubber-stamp President Xi's president for life title, and any further shared prosperity policy initiatives from it, seem to be adding a cautious note to Asian markets today. Asia has a much higher sensitivity to US monetary policy than other parts of the world.
The regional calendar is dead today, with no data of note. The Bank of Japan Summary of Opinions was a cut/paste of the last 30 years. Rock bottom rates to support growth and until inflation appears. Europe is also a bare shelf. Post FOMC, we can expect plenty of Fed speakers this week, although their hawkish tone will likely ring hollow with markets, given actions have definitely not been louder than words of late. On Wednesday, China and US inflation data look to be the week's highlights, and Thursday's Australian Employment print is usually good for some intra-day vol. With a US holiday on Thursday, the back end of the week is likely to be quiet globally unless China springs some surprises from the Central Committee meeting. That probably means a noisy, but ultimately, range-trading week.
Asian stocks stage North Asia/ASEAN split
On Friday, Wall Street ignored the inflationary noise of the Nonfarm Payrolls, choosing to take the broad-based jump in jobs as a sign of accelerating recovery, and duly sent equity indexes to record-high closes. With momentum clearly with buy-everything on anything FOMO camp, the S&P 500 rose by 0.37%, the NASDAQ rose by 0.20%, and the Dow Jones rose by 0.56%. Pfizer's (NYSE:PFE) oral COVID-19 treatment boosting the S&P 500, while a loosening of US travel restrictions starting today, and the passage of the infrastructure bill, played well with the Dow.
In Asia, however, the picture has not been nearly so clear cut. Saudi Arabia's decision to raise crude prices in December to Asian customers by another $1.40, much higher than the $0.50 to $1.0 range expected, has not played well with the North Asia heavyweight. Additionally, JP Morgan has cut its China growth forecast once again, Evergrande has not made another payment, and S&P 500 and NASDAQ futures have given back all of Friday's gains this morning.
That has left Asia in its usual North/South split with Northern heavyweights slipping, while investors have flocked to the more resource-centric ASEAN markets. With S&P 500 futures falling 0.22%, and NASDAQ futures falling 0.40%, Japan's Nikkei 225 has edged 0.20% lower, with South Korea's KOSPI tumbling by 1.0%, although Taipei has risen slightly by 0.20%.
In China, today's rise in oil prices also weighs along with the procession of negatives I have outlined above. The Shanghai Composite is unchanged, while the CSI 300 is down 0.20% and Hong Kong by 0.50%. Beware of false dawns this week in China equities. As with the Central Committee in progress, I fully expect China's "national team" to be "smoothing" any equity negativity by buying any dips in prices.
As usual, these days, a down day in North Asia seems to cause a rotation into ASEAN markets, where heavyweights such as Indonesia and Malaysia have a resource beta. The rise in oil prices has lifted Jakarta by 0.50%, with Kuala Lumpur climbing by 0.20% and Singapore rising by 0.50%. Manila has jumped by 1.05%, with Bangkok up by 0.25%. Australian markets are treading water to start the week, with a robust weekly finish by Wall Street and further reopening measures offset fixed-rate mortgages rise and base metal price falls. The ASX 200 and All Ordinaries are unchanged for the session.
Brexit and Northern Island nerves, and a weak performance by US futures in Asia, are likely to weigh on the UK and European markets this afternoon. However, given Wall Street's religious zeal-like faith in Jerome Powell's read my lips, no rate hikes mantra, it is hard to see the negatively seen in Asia, dragging down North American markets.
US dollar eases post-Nonfarm Payrolls
The US dollar slipped once again on Friday after the recovery in US Nonfarm Payrolls data, as US yields retreated slightly in a somewhat surprising reaction. With markets twisting any data inputs to a recovery narrative linked to the FOMC's no rate hikes post-taper mantra, the Dollar Index slipped slightly, falling 0.12% to 94.22. That said, currency markets appear to be distancing themselves from the ever-bullish equity space in this respect, with the greenback holding onto almost all its recent gains, remaining near two-month highs. With NASDAQ and S&P futures slipping in Asia, the Dollar Index has unwound Friday's losses, rising 0.10% to 94.30 in Asia. 93.80 remains the index's key pivot point and support, while it has well-defined resistance just above 94.50. A close above 94.60 will signal the next leg of the US dollar rally.
EUR/USD has slipped to 1.1560 this morning, with GBP/USD easing 0.15% to 1.3475, although both remain not far from Friday's close. Threats by the UK to enact Brexit protocols over Northern Island are sharply escalating tensions and weighing on both currencies. 1.1500 and 1.3400 are the levels to watch with Brexit tensions likely to play more heavily with sterling. The Japanese yen was the primary winner from the Nonfarm data as the slide in US yields saw USD/JPY fall 0.30$ to 113.40 before rising to 115.60 in Asia. The cross remains at the mercy of the US/Japan rate differential with support holding at 113.40, while a rise through 114.70 signals more gains above 115.00.
AUD/USD and NZD/USD remain almost unchanged over the past two sessions, at 0.7400 and 0.7126, respectively. An easing of Auckland restrictions was announced today, lifting NZD/USD slightly. Interestingly, the wave of bullish sentiment in North America has failed to lift either currency and suggests that both remain vulnerable to further slides if that sentiment dips.
Asian currencies hardly moved on Friday after the US data, as China continues to hold the yuan firm to help offset higher energy prices. The record balance of payments data from China has had no reaction on forex markets today. Regional currencies remain locked in range trading with two notable exceptions, the Thai baht and Indonesian rupiah. The THB continued to receive an international travel reopening boost. Meanwhile, the IDR has rallied sharply today, USD/IDR falling 0.80% to 14,555.00 this morning. Higher oil prices will have helped, but I wonder if the Bank of Indonesia has intervened ahead of 14,400.00 as IDR has been trading to the weak side over the past week. Asian currencies remain in a cautiously watchful mood, perhaps nervous that US markets will have a delayed reaction to the recent run of data and the start of the Fed taper, sending US yields higher.
Saudi Arabia hikes prices to Asia
With OPEC+ refusing to bow to external pressure last week and raise production targets, and with the US Nonfarm Payrolls data outperforming, oil prices finished last week on a very positive note. Brent crude rose 1.75% to $82.30, and WTI leapt 2.50% higher to $81.35 a barrel.
Over the weekend, Saudi Aramco (SE:2222) announced a sharp hike in light crude prices to Asian customers in December by $1.40 to a $2.70 per barrel premium. Markets had forecast a hike of between $0.50 and $1.00, which caught Asia off guard this morning. Northern Asian markets, all massive energy importers, fall today, and crude prices have increased sharply in regional trading. Brent crude has jumped by 1.55% to $83.60, and WTI has risen by 1.05% to $82.25 a barrel.
With Reuters reporting today that China's State Grid is warning of tight winter supply still, and with international travel reopening today in the US, (think jet fuel demand), as well as ongoing easings in Asia/Pacific, and crude stocks at shallow levels in the US Cushing Hub, oil's fundamentals remain constructive. OPEC+ is not raising production, and natural gas prices continue to hold at high levels.
Brent crude has resistance at $85.25 and $86.00 with support at $82.50 and $82.00 a barrel. WTI has resistance at $83.50 and $85.00, with support at $81.00 a barrel.
Gold explodes higher after US data
The rather bizarre post-Nonfarm Payroll price action was capped by gold's explosive rally on Friday, despite US yields and the US dollar easing only slightly. Gold rose 1.50% to $1818.00 an ounce, gaining over $26 on the day. In Asia, trading is subdued, but gold has slightly increased by 0.10% to $1819.85 an ounce.
As with previous gold rallies, I am taking Friday's one with a massive grain of salt. The price action suggests that stop-losses were triggered through $1800.00 and $1810.00, along with the usual rush of trend-following and fast money buyers. If past performance is a judge, none of that positioning is "sticky," with a zero tolerance for any adverse movements against the positioning. In other words, it will rush for the exit door and sell as soon as gold starts moving lower, causing another downside spike.
Nevertheless, if gold can hang on to these gains, things could be about to get interesting on the upside. If gold can hold above its well-defined resistance zone between $1832.00 and $1835.00 an ounce, it will trigger an inverse head-and-shoulders pattern that would target a return to $2000.00 an ounce. Support is at $1800.00 and $1785.00 an ounce, although I suspect that a fall through $1810.00 will be enough to trigger a mad fast-money dash for the exit door.