News & Views: Friday, September 5
What you need to know for today's trading day.
Ukraine Ready for Truce as NATO Cautions on Russian Offer (Bloomberg)
Japan PM's stance on next tax hike 'utterly neutral': econmin (Reuters)
Jobs-Day Guide: U.S. Payrolls, Participation, Wages and Hours (Bloomberg)
BP can absorb new oil spill fine, analysts say (Reuters)
U.S. Mail Delivers Amazon Groceries in San Francisco (WSJ)
The main determinant for today's market action, and likely until the FOMC meeting on Sep 17, is the nonfarm payrolls report. If the report is at least inline or above, there should be a considerable jump in interest rates and will likely accelerate the trend higher for the front end of the curve. If NFP is above 200K, it would be the sixth straight month. The biggest thing is that it will most likely make the FOMC members think seriously about hiking sooner rather than later. Currently only four members of the 19 person committee think that the Fed should start hiking in the 1Q next year - Mester, Plosser, Fisher, and Bullard. If the job growth is solid today, more members will likely join this faction and it might be impossible for the doves to make an argument at the next meeting to keep the "considerable time" phrase in the statement. That is the risk for fixed income investors. If the ADP report from yesterday is any guide, today's NFP will miss to the downside and this risk will diminish. Also keep an eye out for long-term unemployed and part-time workers for economic reasons - some of the main determinants for "labor market slack."
NATO is finally stepping up to the plate with making its military presence known regarding the conflict in Ukraine. This morning, NATO Secretary General Fogh said that the coalition would now hold a rapid reaction force of several thousand troops that could be deployed in a few days to defend against any potential aggressor. He was speaking at the NATO summit in Wales. Poland's President further clarified that the force would be 5,000 strong and headquartered in Poland. This goes back to the Cold War days when the US held troops in West Germany waiting for Russian tanks to come storming through the Fulda Gap - the only real aggressor to Europe with any kind of standing army. And if the force is based out of Poland, it's in close proximity to the states that border Russia - Lithuania, Belarus, Estonia, and especially Ukraine.
In the past three days there has been more IG credit issuance than there was in the entire month of August - $58.1bln according to Bloomberg. The week's HY total is $11bln compared to $3bln in the entire month of August. This has been a key bearish catalyst for interest rates this week.
The Japanese government today acknowledged that its sales tax hike may end up having a more damaging effect on the economy and it may result in them having to stop plans for the second leg of it to 10% (the first was from 5% to 8%). They are also preparing a back-up fiscal stimulus plan should the damage to the economy become lasting - they already are expected to announce a $28bln spending increase to help offset the first hike. The main issue in an economy where the demographic has aged and continues to age is that consumers become net savers. In this case, a sales tax hike, which already dents below-normal levels of consumption, will contract growth even further. Lastly, as a reminder, a new Health Minister was appointed last week, and he had previously said he would make large changes to the Japanese Pension Funds that included raising their equity exposure and lowering government bond holdings. Hey, the BoJ is buying them all up anyway.
- Eurozone GDP (2Q prelim) unchanged at 0.0% vs 0.0% expected, 0.0% advance
-- YoY up 0.7% vs 0.7% exp, 0.7% advance
- German industrial production MoM (Jul) up 1.9% vs 0.4% exp, prior 0.4%
- Japan leading index (Jul prelim) up to 106.5 vs 107.1 exp, prior 105.9
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