The Overnight Report: Non-Farm Payrolls Ahead

This story features KOGAN.COM LIMITED, and other companies. For more info SHARE ANALYSIS: KGN

World Overnight
SPI Overnight	7799.00	– 14.00	– 0.18%
S&P ASX 200	7831.80	+ 91.90	1.19%
S&P500	5537.02	+ 28.01	0.51%
Nasdaq Comp	18188.30	+ 159.54	0.88%
DJIA	39308.00	– 23.85	– 0.06%
S&P500 VIX	12.26	+ 0.23	1.91%
US 10-year yield	4.36	0.00	0.00%
USD Index	105.13	– 0.22	– 0.21%
FTSE100	8241.26	+ 70.14	0.86%
DAX30	18450.48	+ 75.95	0.41%

By Chris Weston, Head of Research, Pepperstone

Good morning.

-Leads from S&P500 futures and EU equity
-Buyers in the CAC40, but the goodwill unlikely to last
-The state of play in the ASX200
-The US nonfarm payrolls playbook
-Labour takes the UK election but the GBP little changed

With US cash equities closed for Independence Day, the leads for the Asia open are missing, and we look at S&P500 futures which have reopened (after the early close) and are essentially unchanged from yesterday’s Asia cash equity close.

European equity bourses also come into play, where we see green on screen, and where the higher timeframes show the set-ups are looking quite attractive for longs. Those brave enough to have recently bought into the CAC40 index now need to see an upside break of 7725 to offer higher conviction the recent consolidation has legs.

French equity rises like a phoenix from the ashes, but the future seems wholly uninspiring – France is shaping up for a hung parliament after this Sunday’s 2nd round vote, but it will be an incredibly messy process, not just in forming a working government, but then having to cohabit with Macron as the President new elections seem probable in 12-months.

Importantly, it’s hard to see a dynamic where any fiscal measures of substance are passed in France and sellers will likely reconnect with this dynamic in the weeks ahead. The EU Stoxx 50 (+0.4%) gets my vote here, and I like longs, covering on a move below 4913.

Our calls for the Asia equity open are predictably uninspiring, with the ASX200 likely to underperform the region, but even then, we’re seeing the index opening -0.2% at 7816. Aussie SPI futures have traded 3,700 contracts, a tenth of what they would typically trade, and while volumes will also be lighter today, there are two dynamics which are considerations for traders.

Firstly, after a solid day’s trade for the bulls yesterday, the index is testing both trend resistance at 7827 and the 25 Jan highs and that is causing some congestion and added supply. Secondly, while participation in US trade ahead will be reduced, as some take an extended break, the US nonfarm payrolls (NFP) loom large and hold real significance to market sentiment.

After Wednesday’s awful US ISM services, and the weaker weekly jobless and continued claims, the recession callers are starting to make their case known again. In the prior May NFP print the market reacted to the payrolls print of 272k above the higher unemployment rate, which was driven by a poor Household survey we shall see what the market chooses to run with this time – the playbook for NFP is always hard to formulate, but this time around a surprise outcome in the unemployment rate could get far greater attention.

The goldilocks scenario in which the S&P500 and NAS100 resume the upside momentum, and where the USD finds modest downside, with Treasury yields lower by -3-5bp, likely comes in a scenario where we see cooling but nothing too dramatic.

Here, the unemployment rate remains unchanged at 4%, with NF payrolls coming in a 180k to 220k range, with average hourly earnings at 3.9%. As always, the market will see what it wants to see, but the US 2-year Treasury will offer the cleanest read on how the market sees the data, where we see yields currently sitting at the recent 4.80% to 4.65% range lows a downside break below 4.65%, and the USD may attract further selling.

A lower unemployment rate at 3.9% and yet another elevated payrolls print of 240k+ could see USD shorts cover. However, given the US economic data flow of late, I think the markets see a bigger reaction if we see a weak outcome, especially after Fed chair Powell detailed earlier in the week that the Fed may be forced to act if the unemployment rate rises.

Switching to the political vibe, President Biden is due to interview on ABC today at 18:30 EDT (23:30 BST / Saturday 08:30 AEST) will we get a surprise here?

Corporate news in Australia

-Kogan.com ((KGN)) and QBD Books are reportedly interested in acquiring the assets of collapsed online bookstore Booktopia Group ((BKG))

-Infratil ((IFT)) has increased its stake in data centre operator CDC

-The ACCC has flagged concerns over Lendlease’s ((LLC)) sale of residential communities to Stockland ((STG)) and Supalai, noting potential competition issues in several regions

On the calendar today:

In Australia: ABS releases the Monthly Household Spending Indicator

-US Nonfarm Payrolls jobs data

-German industrial production

-Eurozone retail sales

Linda Duessel, Senior Equity Strategist at Federated Hermes

This weekend marks the midway point of 2024. Once the Fourth of July cookouts have faded into memory, the second half bull is looking for broadening.

A catchup theme could be in order if inflation eases and rates come down. That would tend to favour value and small caps, both of which would benefit from rate cuts and steady economic growth.

The still-strong labour market constitutes a support for the economy as a whole. That’s been softening, but for now it appears the economy can hold out a little longer at high rates.

The first half of the year is in the top 20 since 1950. That’s frequently a harbinger of good things [for] the rest of the year, though seasonality often hurts returns in August and September.

UBS notes the cap-weighted S&P 500 is expected to outperform the equal-weighted S&P by 3.3% this year. Still, relative earnings expectations are improving for the broader market.

Thus, mega cap tech soared 68.2% in Q4 last year vs. -0.2% for non-tech. By contrast, expectations for Q4 this year are for mega cap tech to rise 20.8% versus 10.8% for non-tech.

The market has already priced in two Fed cuts this year and several more for next year; with cuts already underway elsewhere, this may help the dollar stay strong, potentially favouring US equities.

Spot Metals,Minerals & Energy Futures
Gold (oz)	2365.30	– 0.10	– 0.00%
Silver (oz)	30.68	– 0.13	– 0.42%
Copper (lb)	4.57	+ 0.04	0.83%
Aluminium (lb)	1.14	– 0.01	– 0.78%
Nickel (lb)	7.78	– 0.06	– 0.78%
Zinc (lb)	1.35	+ 0.01	0.37%
West Texas Crude	84.06	+ 0.44	0.53%
Brent Crude	87.56	+ 0.50	0.57%
Iron Ore (t)	113.06	+ 2.74	2.48%

From the FNArena desk:

With US markets closed, investor attention has shifted to Europe where all indicators available continue to point at an electoral wipe-out for the Conservative government.

On the continent, German factory orders fell -1.6% m/m in May, below consensus for a 0.5% m/m lift.

In addition, April has been downwardly revised to a -0.6% m/m fall.

ANZ Bank economists highlight consumer goods orders strengthened, up 4.9% m/m, providing some offset.

Falling inflation and the associated improvement in real incomes is expected to support consumption moving forward, say ANZ economists.

Plus it doesn’t seem like the National Rally party of Marie Le Pen will be able to secure a majority in the upcoming round two of the national parliamentary election.

European equities put in a mildly positive performance.

With the US re-opening later today, US nonfarm payrolls at 10:30am tonight is the key risk event moving into the weekend.

Overall trading volumes are light and with the AUD strengthening overnight, SPI futures are pointing towards another lacklustre Friday session locally.

Returning to the importance of today’s non-farm payrolls update, ANZ Bank’s view is:

“The June FOMC meeting minutes released yesterday emphasised that a strong labour market is consistent with the Fed’s dual mandate and any undue weakness in the labour market could prompt the Fed to act.

“In that context, the nonfarm payrolls report (out 10.30am), will feed into Fed’s thinking about the state of the labour market. The report is expected to show 190k payroll gains in June, down from 272k in May.

“Payroll gains have been trending lower and are moving closer to the 155k-160k pre-pandemic average. A continuation of this trend will affirm to the Fed that labour demand is cooling off.

“However, as noted in the FOMC minutes, due to the strength of immigration and resultant increase in labour supply, the level of employment growth consistent with labour market equilibrium is likely to be higher than in the past.

“The unemployment rate is forecast to be steady at 4.0%. Market participants expect liquidity to be low, as US participants may be away for long weekend.”

Gold traders will be closely watching tonight’s outcome as well, with US treasuries likely the first to respond.

Oil prices weakened slightly from a near two-months high as the supply risk from Hurricane Beryl is easing and OPEC-plus members are continuing to overproduce despite pledges to compensate for overproduction. 

Iron ore is refusing to lay down on expectations for additional stimulus in the upcoming Third Plenum in China.

The Australian share market over the past thirty days

Index	04 Jul 2024	Week To Date	Month To Date (Jul)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7831.80	0.83%	0.83%	0.83%	3.17%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALD	Ampol	Buy	Ord Minnett
ANN	Ansell	Hold	Ord Minnett
BEN	Bendigo & Adelaide Bank	Lighten	Ord Minnett
CSL	CSL	Upgrade to Buy from Neutral	Citi
EBO	Ebos Group	Upgrade to Neutral from Sell	Citi
GEM	G8 Education	Upgrade to Outperform from Neutral	Macquarie
LLC	Lendlease Group	Upgrade to Buy from Neutral	Citi
LTR	Liontown Resources	Upgrade to Neutral from Sell	Citi
MND	Monadelphous Group	Downgrade to Hold from Buy	Bell Potter
STX	Strike Energy	Upgrade to Neutral from Underperform	Macquarie

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms