Markets Morning - Goldilocks jobs data hurts the USD but buoys stocks in the US

Market Analysis /
Greg McKenna / 09 Jul 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.47am Monday, July 9)

Goldilocks is an overused phrase in markets to describe data or an outlook where the prevailing view is nobody gets hurt. And so it was Friday with the release of May non-farm payrolls which appeared to deliver a not too hot, not too cold combination of jobs (+213k), unemployment (4%), and wages growth (0.2%, 2.7%).

That the US economy can still deliver the more than 200 thousand jobs, that it is averaging more than 200 thousand this year is remarkable at this late stage of the recovery. The US dollar reacted negatively to the fact wages didn’t grow as much as expected and that the unemployment rate lifted to 4%. But what this both suggest is that there is more slack in labour market yet. And that means, like Australia, the US economy may still be able to create more jobs yet. That’s good for growth but maybe not wages growth.

So the bet forex and stock traders made is that this Goldilocks – not too hot, not to cold – situation means the Fed may not have to hike rates in the manner it suggested. Certainly once more, but perhaps not twice.

So the Euro is at 1.1750 this morning, through resistance and perhaps on its way to 1.1850, maybe into the 1.1960/1.2060 region some technicians say. The Greenback lost ground against the Pound at well which benefitted from the USD mood and news Theresa May has a deal for Brexit. Messiness is likely still to ensue in that process but GBPUSD is at 1.3322 on the cusp of a breakout. USDJPY is lower with the Yen at 110.32.

That’s because of the US move but we’ll see if the emerging concerns of the North Korean de-nuclearisation process which emerged over the weekend when the DPRK accused the US of bullying it. Mike Pompeo, US secretary of state, seemed to have a more optimistic view of things. But many are already seeing this as China trying to derail the peace process while the tariff and trade battle with the US is on.  

To other Forex pairs then and the Aussie rallied as well but again found the 0.7445/50 region a tough nut to crack – it’s at 0.7425 and dependant on so many factors right now. But the USD’s mood is likely to predominate. The Kiwi is at 0.6835 and the CAD is back at 1.3085 in USDCAD terms as we await the BoC this week.

To stocks now and Europe was more circumspect than the US even though Chinese stocks had managed to rally the day the trade war went live fire. The DAX finished up 0.26%, the CAC was 0.18% higher and the FTSE in London rose by around 0.2%.

In the US it was tech stocks leading the way with the Nasdaq up 1.5%. The S&P 500 rose 0.85% to 2,759 with all sectors in the index higher on the day. The Dow rose 100 points for a 0.4% gain to 24,456.

Here at home, the rally continues with SPI traders adding another 26 points to the 57 we saw added to the ASX 200 on Friday as the surge in Australian stocks – particularly the comeback of the banks – continued. This rally will run until the buyers are exhausted. But it’s not clear when that will be.

On commodity markets, copper found support where it should have at $2.79 Friday and it closed the week at $2.81. Gold dipped a little to $1254 and oil was higher again with WTI back up at $73.80 for the front contract. Though it is worth a big spread between the first and second WTI futures contracts right now. Brent closed the week at $77.11. Bitcoin is still rising and sits at $6,725 for a roughly 2.5% gain.

US bonds ended the day largely unchanged with the rounded spread at 28 points as the 10’s closed 2.83% and the 2’s at 2.55%. Chances of that 4th hike in 2018 dipped a little after Friday’s data.

On the day today, there is nothing of note here in Australia. But Japan releases its current account, bank lending, and eco watchers data. We also hear from BoJ governor Kuroda. Tonight in Germany we get trade data as well as a speech from ECB chief economist Peter Praet at 5pm AEST this afternoon while Draghi is speaking around 1am tomorrow morning.  

Have a great day

Here's What I Picked Up (with a little more detail and a few charts)


  • The question of the day, the week, the year, has to be why nothing really shakes the confidence of investors in a material or sustained fashion anymore. I don’t have the answer. But it was intriguing on Friday that with the tariff war going live Chinese, and other markets, bounced. We’ll probably see little reaction to what looks like a setback in the North Korean denuclearisation talks over the weekend either. It’s intriguing. I don’t have the answer but it turns everyone into a momentum junkie. Or perhaps they already are which is what’s driving the bounce backs.
  • On the US - DPRK talks Secretary of State Pompeo said things went well but the DPRK accused the US of bullying the North Koreans. There is a sense China is at play here somewhere. Indeed Hu Xijin, the EIC of Global Times Tweeted, “Did Pompeo's talks with Pyongyang collapse? The denuclearization of North Korea is both the goal and the process. The bigger the goal, the more complicated the process. If the United States lacks patience, things will be difficult to carry on”. That pretty much sums things up I reckon. The protagonists are moving at different speeds. So along with the trade battle between the US and China this North Korean denuclearisation may take a little longer to work through.
  • But no one seems to care. Well, Bridgewater founder Ray Dalio does and he’s worried. On Friday he tweeted, “Today is the first day of the war with China”. You know my thoughts. I’m framing this battle in a Peloponnesian War-Thucydides Trap framework. SO it’s worth noting the US Navy send two vessels through the Taiwan Strait over the weekend. That’s the first such navigation since 2007. I care, Dalio cares, and I am pleased that President Trump has kept his relationship with President Xi above the fray. It reduces the potential for mishaps. But as Ray Dalio tweeted this morning as his Principle of the Day, we all need to “weigh second – and third – order consequences”. Something to think about in this battle for economic and geopolitical hegemony in the years ahead.  
  • Some folks do care though it seems. While investors pay little heed to risks in developed markets in a manner that has materially undermined prices fund flows, currency, and stock price action in developing markets tells a different story as this Tweet on capital flight from EM highlights.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And of course, copper and other metals prices are reacting as though something is afoot. The question is whether they are telling us there is a big slowdown from current levels of prospective growth coming. This Tweet from Luke Gromen of a Nordea Markets chart suggests there might be.
Source: Twitter Screenshot
Source: Twitter Screenshot


  • After a remarkable 57 point rally on the ASX Friday, SPI traders have added another 26 points in trade till the close Saturday morning.  You can’t argue with this move technically so I won’t. 6,294 is the Fib projection of the last upmove. I should have stuck with that big picture 6,300 call I made earlier this year and bought the dip. But I didn’t. Anyway, this rally will continue until the market runs out of buyers. Maybe this Fibo projection or thereabouts might be the point.
Click on me, I'll expand
Click on me, I'll expand
  • The Aussie dollar should lag this prospective Euro rally if the performance of emerging markets, copper, and other industrial metals is any guide. Indeed as you can see in the table of the Citibank Economic surprise index results below Australian data went backwards last week while others improved. SO for the moment this 0.7445/50 is capping and above that 0.7472/79 also offers resistance. We’ll see how the Aussie goes if the Euro continues to lift. But because this is an anti-USD move the battler will likely ride along but in the slow lane.  


  • Narratives matter in markets. And the narrative that matters right here and right now is the one about central banks. Over the past few weeks forex traders have focussed on a little hawkish rhetoric from the BoC, the BoE, and the ECB which has been accompanied by an improvement in dataflow in those regions and which accompanied a turn in the Pound, CAD, and Euro from their recent lows against the USD. That the changed dataflow and narrative fit the technicals almost perfectly has only given strength to the move.
Click on me, I'll expand
Click on me, I'll expand
  • However, as you can see in the table above the actual outlook for the US still looks much better than it is for the other regions of the globe right now. Sure the data for Europe has improved materially with the CESI bouncing strongly over the past month. That – the bottoming in the CESI and data flow - is what has helped Euro find its feet at 1.15. So that now with the narrative focussed on a US policy mistake and the lack of wages growth in the US the Euro has bounced into the 1.1730/1.1850 resistance zone – or top of the Darvas Box if you prefer. But as you can also see the US data is actually still stronger and the Atlanta Fed GDPNowcast still suggests a Q2 print close to 4%.
  • For the moment though the USD is on the back foot and many of the forecasters I follow reckon the 1.20/1.21 region is on the cards. Here’s a chart from @chigrl on Twitter showing the longer outlook once this recovery has ended.     
Source: Twitter Screenshot
Source: Twitter Screenshot



  • I have to look a little harder at this spread between the first and second WTI contract but it’s looking pretty wide at the moment. What does that tell us? It suggests strongly all the speculative action is in the front contract. That’s no surprise. But does it simply mean the second contract will roar higher or is the first one overpriced? I don’t know – I’ll be back tomorrow.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • To the actual price action then and the battle over what is driving oil continues. The Iranians again accused President Trump and his tweets for driving the price up but the President has hit back with a tweet this morning which effectively disses on the Iranian navy and any chance of it closing the Strait of Hormuz. It’s a neat bit of subtle – but aggressive – trolling.   
  • And to the WTI chart. It still looks like it is rolling over at the moment and my target is $70.84.
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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