NFP is passed, on the agenda - Yellen

FRS increase of rates will be crash for investors and creditors

Last week hasn't pleased fans of surprises, even catastrophically weak NFP has caused quite standard reaction. ECB has disappointed, OPEC has lost to Iran, and FRS just used the last strong reason for blackmail before a June meeting.

Nobody was going to change rates, operations procedure isn't even corrected, a lot of things was heaped up in a temper, and therefore time is necessary for revaluation of already taken actions. Separate performance of Draghi has been urged to create an intrigue, but everything has passed rather quietly.

Nothing new is told: QE - until the end of March 2017, economy - in false optimism and the current monetary policy - a continuous positive. There are no concrete answers why inflation doesn't grow and GDP falls. About Greece: progress, checks of preliminary measures performance for additional MoU, and not any decisions. About Brexit: ECB is ready to any result, no matter of the decision it is supposed to be on friendly terms with Great Britain. Even it`s unclear why euro slightly was nervous. However, NFP has broken any technical assumptions and has allowed to earn to speculators.

Before the Friday report the US dollar had strong support in the American share indexes (2100 on S&P500), in the oil market (WTI $50), in the food market ($5 for wheat bushel) and in the bond market (130 on TN-10-Year). To punch such defense, it was necessary drop the dollar by any arguments.

As a result we have:

New workplaces quantity slash (and updating of April data) against decrease in an unemployment index aims to show to the markets that in the States things are very bad - we have the worst indicator of a gain for more than five years. But it looks very strange. You shouldn't forget about possible consciously made «mistakes» for the purpose of speculative influence on the market before FOMC meeting and the English referendum - in the next month data can be corrected in any party and completely change the overall picture.

If to allow «honesty» of the published NFP data, then it makes an impression that in the American labor market there comes the glut period. That is, not just workplaces are creating, and:

  • there is effective employment with division of a labor according to qualification;
  • employment of such persons on a full time conditions;
  • at small, but optimum demand for experts it is worth waiting for the healthy competition;
  • raises probability of growth of salaries, payroll costs and improvements of all labor market aspects.

External minus of data distracts from the hidden in the BLS review positive. Today unemployment in 4.7% means almost full employment for the USA - any region of the world have no such stable decrease. Active growth of the total workforce, increase of payroll costs and even growth of an indicator of a part-time employment can be treated as increase «quality of employed». Therefore, if the current NFP doesn't lie, then for the Federal Reserve such provision of labor market quite fits into the overall picture of growth. It means that if the decision on rate increase (in June or in July, in September - is already late) is accepted essentially, then no statistics will affect it.

From the other news it should be noted:

  1. Negative rates, thanks to active stimulation from the Central Banks and to appetite of investors, have led to the fact that for the first time in world history the total amount of a sovereign debt with negative profitability has exceeded $10.4 trillion. The European and Japanese papers steadily show minus profitability against decrease in key interest rates and the QE programs. Increase in prices for bonds in Italy, Japan, Germany and France has affected generally papers with shorter repayment periods. Bank assets, certainly, participate in process (their transactions increase the cost of bonds by purchase), but the rules demanding from banks of increase in reserves cause flight of speculative interest in these securities.
  2. As expected, the OPEC wasn't succeeded to reach the agreement on volumes, moreover, was necessary to refuse an oil production quota at preservation of production at the level of 31,5 million barrels per day. Iran continues to live in the market under the own laws: by the end of 2016 plans increase in volume of oil production up to 4 million barrels per day and considers «reasonable market» price in $70. Nevertheless, for the first time for the last half a year we have a chance of decrease in political speculation and stabilization of the oil market.
  3. In anticipation of rates decisions Australia has redeemed from RBA record (for all history of AOFM data) volume of bonds (with term - February, 2017) - $6,7 billion (A$9,3 billion). Bonds have been nullified, at the same time A$11,8 billion a debt remain in a turnover so far.
  4. Estimated Brexit presses not only on passivity of GBP, but on «adjacent factors» - even FRS tells about the forthcoming referendum as a risk factor. This is one more factor not to touch USA rates till the decision of the British.
  5. According to the preliminary data of the referendum results, Switzerland hasn't supported idea of the unconditional income. For the unconditional income (2500 francs in a month - to everyone!) have voted only 18,2% of citizens, against - 81,8%. That is, the people after all have preferred the principle «to each according to his work».
  6. Analysts and regulators repeat for a long time that increase of rates will be crash for investors and creditors, but profitability on bonds all the same remains low so far. By estimates of Goldman Sachs analysts, about $1 trillion will be lost by holders of bonds if profitability on treasury debt papers unexpectedly grows by 1% - as a reaction to possible increases of rates on federal funds and for mortgage bonds without the state support. One more reason for FRS to postpone increase of a rate for several months.

The come week will reflect an echo from results of the American statistics: the decision on a rate in Australia, New Zealand and one more Non-Farm - Canadian is forthcoming. If for decrease in an interest rate on the Australian the American NFP can render a boomerang effect, then NZD which has got support from growth of a business climate index ANZ Business Confidence and data of successful milk auction is quite ready to resolute actions.

On Monday (16:30 GMT) we wait for madam Yellen with the regular hints for terms of the following increase of a rate, within a week we look closely at China with data on trade and inflation, consumer confidence index in the USA. Now all information will be estimated by the principle «the worse - the better» as even small deterioration in macrodata will reduce probability of increase of the rate.

GBP/USD: the pound has sharply decreased at opening of week, survey of YouGov conducted on Sunday which has unexpectedly shown sharp increase in number of the respondents supporting secession of the EU became an occasion. The course restrains interest in purchases in the area 1.4360/50, but similar information signals can give to pound a strong impulse for falling in the next few days. Breakdown 1.4360 will cause decrease to 1.4330/20-1.4330-1.4260. So far we wait for closings of a gap and technical correction to 1.4450-1.4510.

EUR/USD: after Friday technical correction is also necessary. The basic structure in the range of 1.1320-1.1370, trade will define the current trend above/below. Resistance: (1.1380-1.1400) / (1.1450-1.1500) / 1.1550. The next purpose at the movement up - 1.1427, after fixing will be actual the range (1.1443-1.1487-1.1532). The next purpose at the movement down - 1.1280. Supports: (1.1300-1.1270) / (1.1220-1.1200 - large options) / (1.1150-1.1111 - protection against breakdown down).

Author: Lachlan Patel,
ForexChief Currency strategist