Friday, September 2, 2016

US Jobs Data--Higher Anxiety...

...Thank You Mr. Fischer.
From Marc to Market:
The US dollar is little changed ahead of the job report.  Our near-term bias is for a lower dollar.   Sterling is flat and is holding on to about a 1% gain this week.  The Japanese yen is about a 0.3% lower and is off 1.7% this week.  The euro was coming into today for the week.   
The South Korean won is the strongest among emerging markets, rising 0.4% today, recouping a little more than half the week's decline. The rand is little changed, nursing a 1.5% decline this week.  The Brazilian real is flat on the week that saw the president impeached and the central bank leave rates steady.   
The MSCI Asia-Pacific Index posted a minor gain to extend the advancing streak to four sessions.  European shares are mostly higher, with the Dow Jones Stoxx 60 up 0.5% near midday in London.  Financials are down fractionally after losing their upside momentum yesterday.  Core bond yields are higher, and the long-end of the Japanese curve were particularly hit, with the highest yields in a few months being seen.  The ostensible cause is reports suggesting the BOJ may look to steepen the curve, which may mean scaling back the purchases of long-dated bonds.  Oil is finishing its worst week since January with on flat note.  Brent and WTI are off a little more than 8% on the week.
The US jobs report is the single most significant economic piece of economic data in the monthly cycle.  It is understood as a key barometer of the world's largest economy.  The Federal Reserve's dual mandate (really three, if one includes financial stability) puts full employment alongside price stability. 
At Jackson Hole, the Vice Chairman of the Federal Reserve informed the market of two things.  First, the Chair was not signaling a shift in the central bank's stance.  She was not prejudging and ruling out a September hike or scaling the back the June dot plot to one hike rather than two.  Second, that given this,  Fischer instructed, watch today's employment report.  
As it turns out, for the last five years, the August job growth has been reported below expectations.  The average miss is 49k, with a range of 11k-88k.  The median is 44k.    Newswire surveys are picking up a median guesstimate of 175k-180k.   If we pretend that this is statistically significant, and subtract the average/median miss from today's expectation, the result of, say, around 130k, would likely be seen as a disappointment.  The average this year is about 186k. 
The September Fed funds futures closed yesterday implying a yield of 41.75 bp.  The way We calculate it suggested this is equivalent to about a 26% chance.    Bloomberg's estimate is 34% chance.  Here is a major difference.  We are using the average effective fund's rate over the last several weeks of 40 bp.  Bloomberg's calculation is based on where Fed funds closed the month of August, which is 30 bp.  However, in fairness, Fed funds often drop at the end of a month and then return to where they were before.  
Assume then that Fed funds average 40 bp for the first 21 days in September, and the Fed hikes 25 bp, and then Fed fund averages 62.5 bp for the remainder of the month.  The average rate for the month, which is what the contract settles at is a straightforward calculation:  ((21*40)+(9*62.5))/30.  The product is 46.75, which is fair value if the rate hike hiked.   If the Fed does nothing fair value is 40 bp.   The contract implies 41.75.   That is 1.75 bp of a possible 6.75 bp (to get to fair value from the current Fed funds) or 25.9%.  There is no meeting in October, and if we look at that contract for confirmation, it is implying a 26.7% chance that Fed funds target will be 50-75 bp then.... 

Here's the CME's Fedwatch tool, it currently stands at a 27% chance of a bump to .50%