Stocks are poised to have their worst trading week of the year as global growth concerns outweigh the recent wrath of dovishness from central banks. This morning the ECB’s dovish message took the euro to the lowest levels against the dollar since June 2017 and was the main contributor to the broad risk off trading day.
NFP – Job growth may come back down to trend
ECB – Dovish policy measures shows things might be worse than feared
CAD – Expected to see minimal job gains
Oil – Tightness in market continues to outweigh US production concerns
Gold- Unable to deliver strong rally on today’s risk off trading
Tomorrow’s employment and wage report for the US could either support the view that both the labor market and wages remain strong or that we are finally seeing softness hit these metrics. The Fed has clearly signaled they are on hold for the foreseeable future and the financial markets are undecided on what will be the next move, a rate hike or cut.
Following last month’s blockbuster report of 304,000 jobs created in January, expectations are for the February reading to show 180,000 jobs created, with a low estimate of 85,000 and a high forecast of 250,000. Investors however should not be surprised if we see a disappointing headline number and significant downward revision.
The Fed’s Beige Book noted that employment growth is now ‘modest to moderate’ and while economic activity for most regions expanding at a slight to moderate pace, expectations will likely grow for employers to ease up on hiring. This week’s ADP report showed private payrolls added 163,000 jobs, while the Challenger, Gray & Christmas report showed 76,835 job cuts in February, which was the highest total since July 2015. If we see softer wage data and a sub 100,000 nonfarm payroll headline, expectations will grow for the Fed’s next move to be a rate cut. A strong beat could see the euro collapse towards 1.1050.
ECB’s Draghi went into the toolbox and unleashed a handful of measures to help an ailing euro zone. Many expected a dovish policy meeting, but the extraordinary steps taken were more than what was priced in.
The ECB downgraded both their inflation and growth forecasts a little more than what most were expecting and the announcement of cheap loans to help trouble banks came perhaps one meeting before than what most expected. The financial markets already priced in no rate hikes for 2019 and the ECB finally pushed their guidance back for the December rate hike. The Bank also noted they will keep reinvesting principal payments from maturing securities to assure favorable liquidity conditions. The ECB also will help allow counterparties control the amount of liquidity by operating with a fixed-rate tender procedures with full allotment. To sum up, this was more dovish than what most economists expected and suggests the ECB thinks things are much worst than feared.
The political and economical headlines have been very concerning for Canada and many are curious to see if we will see that weakness trickle down to the labor market. January’s employment report posted a robust 66,800 reading with an unemployment rate of 5.8%, slightly above the 44-year low of 5.6%. Current expectations for the February reading are for 1,200 jobs created and for the unemployment rate to remain steady. A soft employment number will support the Bank of Canada’s dovish pivot and will further cement expectations for the next move to be a rate cut.
Crude prices are higher today on expectations tightness will be the story for the first half of the year. What is impressive about today’s price action is that oil’s rally is shrugging off the slower growth concerns that are hitting the other asset classes. Rising US production should eventually cap any major rally from here, but until we see US production consistently post bigger builds in stockpiles, prices might see less resistance to the upside.
Surprisingly gold has been unable to muster up a decent rally following today’s risk off trading. The stimulus packaged revealed by the ECB did little to alleviate the risk off tone as markets remain focused on slower growth concerns. If we see softer wage and employment from the US, that may be the catalyst to help the precious metal.