Daily Kickstart (US Payrolls Awaited, China Tightens, BoJ Flouts Trump)

“Non-Farm Friday is no time to plead exhaustion,” Bloomberg’s Richard Breslow wrote earlier this morning as we look to close out a rather trying week (mentally anyway) on a high note in the US.

We’ll get payrolls on Friday and the market will be eyeing the report even more closely than usual, as we look for signs that the Keynesian animal spirits are alive and coursing through the veins of the US economy thanks largely to the great white (or maybe “orange” is the better adjective) hope that now inhabits the Oval Office.

(Bloomberg)

You can read Goldman’s NFP preview here, and when it comes to what money managers will likely do once the number is in the proverbial books, BMO strategist Ian Lyngen did a survey. The results are amusing. “To get the market to price a March Fed rate increase at 50/50, the average response was +277k nonfarm payrolls (range from +200k to +500k),” BMO found. Here’s the punchline (bolded):

If market trades higher in price after jobs report:
- 53% plan to do nothing vs 49%
- 29% would sell vs avg 29%
- 18% would buy vs avg 12%
If market trades lower after jobs report:
- 46% plan to do nothing vs avg 41%
- 38% would buy vs avg 46%
- 15% would sell vs avg 13%

So, as Bloomberg writes, the “survey results showed strong bias to ‘do nothing.'” It would certainly seem then, that there is indeed a strong propensity to, as Breslow puts it, “plead exhaustion.” Here’s the full data schedule for the US on Friday:

8:30am: Change in Nonfarm Payrolls, Jan., est. 175k (prior 156k)
- Unemployment Rate, Jan., est. 4.7% (prior 4.7%)
9:15am: Fed’s Evans Speaks on Economy and Policy in Olympia Fields
9:45am: Markit US Services PMI, Jan. F (prior 55.1)
10am: ISM Non-Manufacturing Composite, Jan., est. 57.0 (prior 57.2)
10am: Factory Orders, Dec., est. 0.7% (prior -2.4%)
10am: Durable Goods Orders, Dec. F (prior -0.4%)
- Capital Goods Orders Non-Def Ex-Aircraft & Parts, Dec. F (prior 0.8%)
1pm: Baker Hughes rig count

Overnight there was some interesting action in Japan. On Thursday I noted that the BoJ failed to step in and arrest rising yields on JGB 10s. “The BoJ’s failure to hold a fixed rate auction may indicate Kuroda isn’t all-in on anchoring 10s after all,” I wrote, adding that “this has implications for FX.”

Well on Friday, the BoJ did step in. “First the BOJ seemed to give the green light for 10-year yields to rise above the self-imposed 0.10% level by keeping bond purchases at 450b yen [and] markets took note, sending yields to a one-year high of 0.15%,” Bloomberg’s Tommi Utoslahti wrote, early Friday. He continues: “Less than three hours later, the central bank returned with an unlimited fixed-rate operation at 0.11%, which is still above the perceived range of 10bps above or below zero. What exactly is the message here? That 0.11% is acceptable but 0.15% isn’t?”

Well, no. The message is that the market is testing the BoJ’s resolve in the face of Trump’s currency manipulator accusations and Kuroda is doing his best, but it’s going to be super f*cking hard. That’s the message. Here’s a great summary:

Daiwa Securities (Yukio Ishizuki, senior currency strategist)
- Had BOJ been concerned about being criticised for currency devaluation and refrained from taking any action, that would have admitted implicitly that its monetary policy was targeting exchange rate
- Important for BOJ to keep easing regardless of fluctuations in exchange rate to achieve goal of ending deflation

Mitsubishi UFJ Morgan Stanley Securities (Naomi Muguruma, senior market economist)
- 0.110% level for fixed-rate buying still meets criteria for its “around zero” target, doesn’t carry any policy implications
- Yields still remain under upward pressure given domestic investors aren’t likely to move decisively ahead of fiscal year-end and amid uncertainty over what Trump will say about Japan’s currency and monetary policy

Nomura Securities (Takenobu Nakashima, quantitative strategist)
- What’s astonishing is that BOJ offered to buy at yields lower than where markets were
- Central bank would actually pay to buy, showing it wants to halt rise in yields

Mizuho Securities (Kengo Suzuki, chief FX strategist)
- Fact that BOJ announced fixed-rate operation before usual time of 2pm shows central bank’s seriousness about yield curve control
- BOJ’s commitment to bond buying, and Fed raising rates will push up USD/JPY

So there Trump. Take that.

In China, the PBoC hiked repo rates in the first trading day following the Lunar New Year and the market took notice. “This is the clearest evidence so far that monetary policy is being tightened and that supporting growth is no longer the primary immediate goal of China’s policymakers,” Capital Economics wrote, in a note out Friday, before adding that “the move is best seen as an official acknowledgement of the on-the-ground tightening that has been evident since November.” Needless to say, that same “on-the-ground tightening” has been documented extensively in these pages.

(Capital Economics)

Here’s more on the PBoC’s tightening efforts:

Societe Generale (Frances Cheung)
- Increase in 7-day money-market rate, in particular, suggests a hawkish stance
- Although central bank hiked rates only in shorter tenors, entire yield curve is rising, indicating markets remain concerned over further deleveraging
- Investors could stay on the sidelines or shift their focus to shorter maturities as debt market is likely to be volatile in 1Q

Citic Securities (Ming Ming)
- Hike in money-market rates along with PBOC’s increase in MLF rates last month suggest central bank has started to raise rates across the board
- PBOC’s recent monetary tightening is aimed at encouraging deleveraging and preventing further acceleration of credit growth
- Chinese bonds will probably enter a “technically bear market” on the back of PBOC’s move; 10-year bond yield is likely to rise to 3.5% in near term

ICBC International (Cheng Shi)
- Rate increases are intended to prevent credit from growing too fast; central bank’s move doesn’t signal broad-based monetary tightening as amount of liquidity available to borrowers is still ample
- PBOC may be seeking to curb short-term risks such as an asset price bubble and inflation pressures that may emerge following a possible peak in economic growth in 1Q
- Higher rates are likely to help stabilize yuan further

Bocom International (Hao Hong)
- PBOC is raising floor of China’s interest-rate corridor to guide market rates higher and encourage deleveraging
- Rate increases may put pressure on small- and medium- sized banks, which already face difficulty in borrowing in money market to roll over their off-balance-sheet assets

Asia market summary:

MSCI Asia Pacific down 0.2% to 142
Nikkei 225 up less than 0.1% to 18918
Hang Seng down 0.2% to 23129
Shanghai Composite down 0.6% to 3140
S&P/ASX 200 down 0.4% to 5622

In Europe, shares are higher pretty much across the board ahead of US payrolls. The Eurozone services PMI came in unchanged from last month, while retail sales missed estimates.