The much-anticipated payrolls day, expected to provide at least some more clarity on future Fed policy, has arrived and heading into today's report both price action and news-flow has been muted. U.S. equity index futures were fractionally higher, as European stocks rise 0.6% while Asia was flat. Gold fell as the dollar rose, while comments by Vladimir Putin which endorsed an OPEC oil production freeze while granting Iran an exemption, have pushed oil higher.

Federal Reserve Vice Chairman Stanley Fischer said this week that upcoming economic reports would determine the trajectory of interest-rate increases, having previously highlighted Friday’s payrolls update as being of importance. Odds of a rate increase at the Fed’s September meeting have swung between 34 percent and 36 percent this week amid conflicting data showing an improving jobs market and an unexpected contraction in manufacturing.

"Investors are on tenterhooks ahead of today’s U.S. employment report following a host of hawkish Fed comments,” Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh told Bloomberg. “The front-end is vulnerable to an upside surprise in payrolls and that explained a pick-up in yields ahead of the data.”

Treasuries fell and the dollar advanced in the countdown to a key U.S. jobs report that’s seen shaping expectations for the timing of the next interest-rate increase.Yields on 10-year Treasuries climbed to the highest level this week with the yield on the 10Y rising three basis points to 1.59%, leaving them down three basis points this week. The two-year yield increased by one basis point to 0.79 percent. It’s still down five basis points for the week.

US yields were not the only ones to rise. Japanese 10Y government bonds declined amid uncertainty over whether the Bank of Japan will tweak its debt-buying program this month and concern over demand at upcoming auctions. The 10-year yield touched minus 0.02 percent, the highest since March.

“[Japanese] yields are rising on wariness that the BOJ might reduce purchases in the super-long sectors when it meets this month,”said Souichi Takeyama, a strategist at SMBC Nikko in Tokyo. “Rising volatility is also raising concerns about demand at a slew of auctions this month.”

The Stoxx Europe 600 Index added 0.6%. Equities have struggled to maintain momentum in recent weeks, and a Bank of America report showed investors pulled cash from funds tracking the region’s equities for a 30th straight week. Rocket Internet SE slid 7.5 percent after the German startup investor announced a first-half loss. SBM Offshore tumbled 13 percent after a Brazilian prosecutor failed to ratify a leniency agreement related to a bribery case concerning Petroleo Brasileiro SA. Adidas AG lost 1.3 percent after Callaway Golf Co.’s chief executive officer said it will not bid for the German company’s golf division. Futures on the S&P 500 Index were little changed after equities ended Thursday little changed.

The Bloomberg Dollar Spot Index extended a second weekly gain. European
stocks advanced as volatility hovered near a one-year low. Crude pared
its biggest weekly drop since January, while gold traded close to the
lowest since June.

Crude oil rose 0.5 percent to $43.36 a barrel in New York, after tumbling 9.4 percent over the last four days. U.S. inventories increased last week, keeping supplies at the highest seasonal level in at least three decades, official data showed Wednesday. OPEC members plan to meet this month in Algiers to discuss action to stabilize the market and Saudi Arabia has said a cap on production would be positive. Russian President Vladimir Putin said he’s confident such a deal will be agreed.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2168
• Stoxx 600 up 0.6% to 346
• FTSE 100 up 0.7% to 6791
• DAX up 0.3% to 10562
• German 10Yr yield up less than 1bp to -0.06%
• Italian 10Yr yield up less than 1bp to 1.17%
• Spanish 10Yr yield up 1bp to 1.07%
• S&P GSCI Index up 0.5% to 343.6
• MSCI Asia Pacific up less than 0.1% to 138
• Nikkei 225 down less than 0.1% to 16926
• Hang Seng up 0.5% to 23267
• Shanghai Composite up 0.1% to 3067
• S&P/ASX 200 down 0.8% to 5373
• US 10-yr yield up 3bps to 1.59%
• Dollar Index up 0.13% to 95.78
• WTI Crude futures up 0.7% to $43.46
• Brent Futures up 0.8% to $45.83
• Gold spot down 0.2% to $1,311
• Silver spot down 0.3% to $18.83

Top Global Headlines

• Full Employment Without Wage Jump Tests Fed Pining for Inflation: Sharpening debate today will be August employment report.
• Putin Pushes for OPEC Oil-Freeze Deal, Exemption for Iran: “It would be correct to find some sort of compromise,” Putin said in an interview in Vladivostok; Putin: DNC Hack Was Public Service, Russia Didn’t Do It
• Global Banks Said to Seek Special Brexit Deal to Keep Status Quo: Cos. asking U.K. PM Theresa May for interim agreement with EU for financials before formal exit talks start.
• VeriFone Slides After Cutting 2016 Profit, Sales Forecasts: FY 2016 earnings will be $1.64-$1.65/share ex-items, down June forecast of $1.85.
• Google Said to Have Axed Plan for Modular Smartphone: Reuters: Co. may work with partners to bring Project Ara’s technology to market, potentially via licensing; Google Said to Unveil New Pixel Phones on Oct. 4: Android Police
• Google, Amazon, Others Said to Form A.I. Ethics Group: NYT: Specifics of group’s actions, name yet to be discussed.
• California Bill Grants Utilities Power Storage Rights: Would give utilities authority to operate energy storage systems for homes, businesses.
• China to Begin Antitrust Review of Comcast’s DreamWorks Deal: Ministry of Commerce received complaints over China plans.

Looking at regional markets, we start in Asia where stocks moved indecisively following the flat lead from Wall St. as participants await September's NFP jobs data. Choppy trade was observed in Nikkei 225 (-0.01%) as USD/JPY attempted to nurse its declines from the prior session, while ASX 200 (-0.6%) underperformed amid continued weakness in energy prices. Chinese markets traded tentatively with the Hang Seng (+0.3%) and Shanghai Comp (-0.1%) conforming to the indecisive tone, while the PBoC conducted a net weekly drain of CNY 173.5bIn. 10yr JGBs were lower with a lack of demand seen amid quiet trade, while indecisiveness in stock markets and the BoJ's presence in the market also failed to provide support. BoJ's Sakurai stated that there is plenty of scope to purchase additional ETFs, deepen negative rates and increase JGB purchases, adding that the central bank's decision on whether to ease in September and beyond is largely dependent on how BoJ analyses NIRP effects. PBoC set CNY mid-point at 6.6727 (Prey. 6.6784) PBoC injected CNY 30bIn via 7-day reverse repos and CNY 10bIn in 14-day reverse repos, for a net weekly drain of CNY 173.5bIn vs. last week's injection of CNY 310bIn.

Top Asian News

• Anbang Prompts Soul-Searching as Morgan Stanley, UBS Divided: banks weigh dearth of large deals against disclosure questions
• China’s Zhu Says Monetary Policy Ineffective, Fiscal Aid Needed: G-20 communique to flag need for comprehensive policy
• Hong Kong Home August Sales Hit 14-Month High as Mood Lifts: sales value of HK$40.6b vs July’s HK$29.7b
• Putin Pushes for Oil Freeze Deal With OPEC, Exemption for Iran: Producers need to compromise on Iran’s involvement
• Putin Sees Opening With Japan on World War II Island Dispute: Putin to discuss islands with Japanese leader Abe on Friday
• Samsung Plans Global Recall of Note 7 Phones, Yonhap Reports: Company is evaluating issues with the big-screen smartphones
• E-Land Sells Teenie Weenie to Chinese Label in $900m Deal: Chinese labels are competing for growing urban middle class
• Singapore Sale of Rare Marina Bay Land Set to Fetch Bumper Price: Financial district plot may fetch S$1.8b

European equities reside in modest positive territory, albeit off best levels and paring some of the opening gap. In terms of notable underperformers, material names are once again among the laggards today, as has been the case throughout the week while telecom names have also seen pressure this morning, weighed on by BT (-1.6%) after a negative broker move. Trade in fixed income securities has been similarly muted, with Bunds moving back to flat on the session by mid-morning after opening in the red. As well as the aforementioned US nonfarm payroll report, today may also see focus fall on Spain and Spanish paper, with interim-PM Rajoy facing his latest confidence vote this afternoon, needing a simple majority to retake the position of permanent PM.

Top European News

• Deutsche Bank’s Cryan Weighs Drastic Steps as Revamp Sputters: CEO, his top managers will meet this weekend to assess progress on reorganization.
• Dark Pools’ Record Share Signals Looming Market Shock in Europe: Usage puts traders who use them on collision course with new regulations that will restrict buying, selling.
• Putin: Euro Area May Shrink After Brexit Set Precedent: “I don’t rule out that there could be some decisions made that would consolidate a group of countries,” Russian president said in Bloomberg interview.
• Ireland May Be Closing in on Apple Ruling Appeal Accord: Govt to resume deliberations on fighting this week’s EU decision on Apple tax arrears, amid signs that cabinet agreement may be nearing.
• Fiat’s Emissions Cleared by Italy as Germany Seeks Deeper Probe: Germany this week escalated dispute between 2 countries, asking EU to step in.
• Rocket Falls After Writing Down Value of Global Fashion Group: Writedown contributed to 1H loss of EU617m at startup factory.
• Adidas Underperforms After Callaway CEO Comments, HSBC Downgrade: Callaway CEO Chip Brewer said there’s little chance co. would be interested in Adidas’s TaylorMade.
• Repsol Said to Weigh Sale of PNG Exploration Assets: Considering sale of assets acquired from buying Talisman Energy.

In FX, the Bloomberg Dollar Spot Index gained 0.1 percent after slipping 0.4 percent on Thursday, its first loss in a week.U.S. jobs growth slowed to 180,000 last month from 255,000 in July, according to a Bloomberg survey of economists. The yen fell 0.3 percent, extending its weekly slide to 1.7 percent. “There is potential for markets to whipsaw should we see robust U.S. jobs data,” Sharon Zollner, a senior economist in Auckland at ANZ Bank New Zealand Ltd., said in a client note. “A stronger U.S. labor market isn’t new news for the Fed or its watchers, rather, it is areas such as manufacturing and retail that are currently causing concern, not to mention a generalized lack of inflation. But nonetheless, payrolls data is traditionally a big market mover, so buckle up.” South Korea’s won strengthened 0.4 percent, trimming its weekly loss versus the greenback. The central bank raised its second-quarter economic growth estimate to 3.3 percent, having previously announced a 3.2 percent expansion from a year earlier.

In commodities, the Bloomberg commodity Index rose 0.2 percent, trimming its weekly slide to 3.2 percent. Crude oil rose 0.5 percent to $43.36 a barrel in New York, after tumbling 9.4 percent over the last four days. U.S. inventories increased last week, keeping supplies at the highest seasonal level in at least three decades, official data showed Wednesday. OPEC members plan to meet this month in Algiers to discuss action to stabilize the market and Saudi Arabia has said a cap on production would be positive. Russian President Vladimir Putin said he’s confident such a deal will be agreed. Gold fell 0.2 percent, headed for a 0.8 percent weekly loss. The metal retreated since mid-August as hawkish comments by Fed officials spurred speculation a U.S. rate hike is coming, eroding the appeal of assets such as bullion that don’t bear interest. Most industrial metals rose on Friday in London, led by a 0.7 percent advance in tin. Lead, tin and zinc all climbed to levels last seen in the first half of 2015, having been buoyed by data on Thursday that indicated manufacturing is picking up in China, the world’s second-biggest economy.

Looking at the day ahead, it’s all eyes on the US employment at 8:30am where along with expected 180k increase in payrolls we’ll get the unemployment rate (market expectations for 4.8% vs. 4.9% in July), average hourly earnings (+0.2% mom expected) and the participation rate. Also due out will be the July trade balance (a modest shrinking of the deficit expected), July factory orders (+2.0% mom expected), ISM-NY and final revisions to durable and capital goods orders in July. The Fed’s Lacker will also speak at 6pm BST tonight on interest rate benchmarks.

Bulletin Headline Summary from RanSquawk and Bloomberg

• Indecisive trade in Europe with all eyes on the latest US NFP report at 1330BST
• Allied to the US NFP reports, participants will see the release of US Trade Balance, Baker Hughes Rig Count and comments from Fed's Mester.
• Treasuries trading with downside bias overnight before U.S. August nonfarm payrolls, est. 180k, with unemployment rate falling to 4.8% from 4.9%.
• It took more than a decade for Paul Volcker and Alan Greenspan to wring persistently high inflation from the U.S. economy. Federal Reserve officials now may need at least half that time to bring too-low inflation back to their target
• Russian President Vladimir Putin said the euro area could someday shrink in size if its stronger members sought to close ranks
• The world’s largest banks are into the home stretch of a long campaign to convince politicians and regulators that planned changes to their capital requirements will suffocate the industry and imperil lending and growth. All that lobbying is paying off when it counts
• Theresa May has a delicate balance to strike this weekend when she arrives in China, attempting to foster confidence that Britain remains open for business despite its decisions to leave the European Union and delay an 18 billion-pound ($24 billion) nuclear power project
• A U.K. construction index surged in August from a seven-year low as the building industry showed signs of stabilizing following the shock inflicted by the Brexit vote
• Now that the Bank of Japan owns 34 percent of the government’s debt, brokerages are betting its next step will be to boost its current 6 percent stake in corporate bonds
• Japanese government bonds’ worst week in a month sent 10- year yields almost back up to zero amid speculation the Bank of Japan will tweak its debt-buying program this month and concerns that demand will decline at auctions this month

US Event Calendar

• 8:30am: Trade Balance, July, est. -$41.4b (prior -$44.5b)
• 8:30am: Unemployment Rate, Aug., est. 4.8% (prior 4.9%); Change in Nonfarm Payrolls, Aug., est. 180k (prior 255k); Labor Force Participation Rate, Aug. (prior 62.8%)
• 9:45am: ISM New York, Aug. (prior 60.7)
• 10am: Factory Orders, July, est. 2% (prior -1.5%); Durable Goods Orders, July F est. 4.4% (prior 4.4%)
• 1pm: Fed’s Lacker to speak in Richmond, Va.
• 1pm: Baker Hughes Rig Count

DB's Jim Reid concludes the overnight wrap

One is always very nervous publishing new documents that have involved weeks of work ahead of a big payrolls report that could be a big market mover. However that's where we stand and today has the potential in theory to reprice Fed September rate hike expectations nearer to or even above 50% (34% currently but down from 42% last Friday), especially if we print notably above 200k. Remember that just after the Brexit vote you had to go out to the end of 2017 to see the first Fed hike being priced. Although trying to predict a fairly random number is a mugs game I would take the low side of the 180k consensus today (DB at 160k). A lot of people were a bit nervous about the seasonal distortion in last month's strong report and as DB's Joe LaVorgna pointed out earlier this week, over the last 5 years the initially-reported August nonfarm payroll gains has consistently disappointed consensus and by an average of 52k.

In today's PDF we show the average payroll for each month since January 2010. As the graph shows August has tended to be a weaker month relative to the rest of the year. Indeed since the start of the sample the average monthly payrolls reading is +186k while the average August reading is just +150k (which is the joint lowest with July). Although July's number went against this trend, will both July and August buck their seasonal trend?

Leading into the number the manufacturing ISM (49.4 vs. 52.6) showed broad based weakness: New orders (49.1 vs. 56.9), production (49.6 vs. 55.4), employment (48.3 vs. 49.4) and inventories (49.0 vs. 49.5) all declined in August and this may have helped bring expectations down for today’s payrolls below the consensus noted on Bloomberg. Fed rate hike probabilities weren’t greatly moved (September down 2% to 34% and December unchanged at 60%) but we did see the Greenback come under pressure (Dollar index -0.38%) and 2y and 10y Treasury yields fall as much as 4bps and 6bps respectively from the pre-ISM highs. The S&P 500 ended the day unchanged after rallying back from early losses while US credit was a smidgen wider (CDX IG +1.1bps).

Even with the Dollar under pressure Oil markets continued to move sharply lower. WTI closed yesterday -3.45% lower at $43.16/bbl and is now down over 9% this week alone with the bigger than expected rise in US crude inventories data on Wednesday at the heart of it all. It’s amazing to think that just over two weeks ago WTI was in the midst of a 7-day surge which saw it rally nearly 16% on rising expectations of OPEC action. How quickly sentiment can swing.

Meanwhile European bourses yesterday had been for the most part trading with a relatively positive tone following the earlier released PMI’s however the US data softened these gains. The Stoxx 600 finished +0.04% after being up as much as +0.96% in the early going. Just on those PMI’s the clear standout yesterday was the UK’s manufacturing reading which was up a bumper 5pts in August to 53.3 and well exceeding the 49.0 consensus. The monthly increase was in fact the joint greatest in the near 25-year of survey history according to Markit, while the current level is not only higher than pre-Brexit but also now the highest since October last year. The rebound from July was also made more remarkable by the fact that globally the UK’s PMI in July (48.3) was only higher than Brazil (46.0) and Turkey (47.6) however the August reading was only lower than Germany (53.6) and Netherlands (53.5). Unsurprisingly then it was a good day to be long Sterling (+0.99%), while 10y Gilt yields also ended up climbing nearly 3bps to a four-week high.

Refreshing our screens this morning, markets in Asia this morning are for the most part higher although moves are overall fairly modest. Leading the way is the Hang Seng which is +0.4%, while the Nikkei(+0.05%), Shanghai Comp (+0.13%) and Kospi (+0.08%) are also firmer. Australian equities (ASX -0.96%) are underperforming the rest of the Asia-Pac region. Meanwhile Oil has recouped about 1% this morning, however US equity index futures are ever so slightly in the red.

In terms of the rest of the data yesterday, the final Q2 nonfarm productivity reading of -0.6% qoq came in as expected, however there was a big upward revision to Q2 unit labor costs from +2.0% qoq to +4.3%, with hourly compensation surging. Construction spending was a little disappointing for July (0.0% mom vs. +0.5% expected) however the June data was revised up significantly to +0.9% mom from -0.6%. Meanwhile initial jobless claims rose 2k last week to 263k, and finally total vehicle sales printed at a fairly disappointing 16.9m in August annualized, down from 17.8m the month prior. The Atlanta Fed subsequently cut their Q3 GDP forecast to 3.2% from 3.5% with the soft ISM data more than offsetting the upward revision to construction spending.

With regards to the remaining PMI’s in Europe, aside from the UK there wasn’t much to move the dial. The final Euro area reading was revised down 0.1pts to 51.7. Germany was unchanged at 53.6 while France was notched down 0.2pts to 48.3. A first look at the periphery revealed that Italy (49.8 vs. 51.2 expected) disappointed but Spain (51.0 vs. 50.9 expected) was marginally ahead.

Before we wrap up, there was also a bit of Fedspeak yesterday with the relatively hawkish Cleveland Fed’s Mester speaking. She said that ‘it seems like a gradual increase from a very low-interest rate that we are at now is pretty compelling to me’ without specifically pinning down timings. Mester added to this that ‘I do not believe that at this point in the business cycle, the current very low level of interest rates is an effective solution’.

Looking at the day ahead, in Europe it’s pretty quiet with just Italy’s Q2 GDP report of note. This afternoon at 1.30pm BST it’s all eyes on the US employment where along with payrolls we’ll get the unemployment rate (market expectations for 4.8% vs. 4.9% in July), average hourly earnings (+0.2% mom expected) and the participation rate. Also due out will be the July trade balance (a modest shrinking of the deficit expected), July factory orders (+2.0% mom expected), ISM NY and final revisions to durable and capital goods orders in July. The Fed’s Lacker will also speak at 6pm BST tonight on interest rate benchmarks. The ECB’s Hansson is also due to speak in Tallinn this morning on the Brexit impact for the EU while over the weekend G20 leaders meet in China so it’ll be worth seeing if anything interesting comes from that. As a reminder with Labour Day on Monday, US markets will be shut.