Powell Confirmed as Trump’s Nomination for Fed Chair, Tax Bill Released, Non Farm Payrolls Next

Fed Governor Jerome Powell was finally confirmed as US President Donald Trump’s nomination as the one to succeed Janet Yellen as Fed Chair next year. House republicans also released the tax bill finally. Stock markets responded well to the news with DOW closing up 81.25 pts, or 0.35% at new record high. S&P 500 also reversed earlier loss and closed up 0.02% at 2579.85. But judging from the reactions in bonds, Powell is taken as a dovish Fed chair. 10 year yield lost 0.029 to close at 2.347, notably lower comparing to last week’s close at 2.428. Powell is seen as a safe choice that would largely follow Yellen’s path of gradual tightening. Focus will now turn to non-farm payrolls report.

House released Tax Cuts and Jobs Act

The House of Republicans eventually released the tax bill, the Tax Cuts and Jobs Act. The key reforms include: trimming the number of income tax brackets to 4 from 7; cutting the top corporate tax rate from 35% to 20%, and the pass-through rate for certain business partnerships is reduced to 25%; introducing a one-time repatriation tax of 12%; limiting the mortgage deductions and a 10% tax on profits for overseas subsidiaries of US corporations, etc.

Most of the bill are scheduled to take effect on January 1. Or, if the passage in Congress drags into next year, the lawmakers are expected to make it retroactive. The House Ways & Means Committee will begin a multi-day "markup" of the bill on November 6. House Speaker Paul Ryan intends to pass the legislation through House by thanksgiving. In the mean time, the Senate Finance Committee will launch a panel process. And the two would hope to resolve all the differences and pass a final bill by year end.

High expectations on Non-Farm Payrolls

Expectations on today’s non-farm payroll report is high. Markets expect 310k growth in the US employment market in October, a strong rebound from hurricanes dragged -33k contraction back in September. Unemployment rate is expected to be unchanged at 4.2% in October. Average hourly earnings are expected to grow 0.2% mom. The figures could be heavily skewed as the aftermath of hurricanes. But judging from other employment related data, the job market in US remained pretty healthy.

ADP private payroll showed 235k growth in October, up from September’s 110k. Four week moving average of initial jobless claims dropped notably from 267k to 233k during the month. Employment component of ISM manufacturing dropped from 60.3 to 59.8 but stayed high. Conference Board consumer confidence hit 17 year high at 125.9. These are solid readings that point to a strong labor market.

Sterling turning technically bearish

Sterling recovers mildly today but remains the weakest major one after yesterday’s post BoE steep selloff. Technical development in the Pound has turned "slightly" dovish but key support levels are still intact. With break of 1.3068 support, GBP/USD is heading to 1.3026 level. Decisive break there will resume whole decline from 1.3651 and target key support level at 1.2773. And such development will also raise the chance of medium term bearish reversal. EUR/GBP is still far off 0.9032 resistance and thus, technically maintaining bearish outlook in the cross. GBP/JPY breached 148.88 support and is now in favor to break through 146.92 to resume the decline from 152.82. But such price actions in GBP/JPY from 152.82 are viewed as a correction pattern only.

More on BoE:

• BOE Increased Policy Rate for First Time in More than A Decade
• BoE Keeps its Flexibility on Further Rate Hikes Next Year
• Bank of England Raises Interest Rates for the First Time in Over a Decade
• "Dovish Hike" Excites Sterling Bears
• "One and Done" Rate Hike Triggers GBP Selling

Elsewhere

Australia retail sales rose 0.0% mom in September, below expectation of 0.4% mom. China Caixin PMI services rose to 51.2 in October. UK PMI services will be a key focus in European session and could trigger deeper selloff in Sterling. US will release trade balance, non-farm payrolls, ISM services and factory orders. Canada will also release trade balance and employment data later today.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2966; (P) 1.3133; (R1) 1.3224; More….

GBP/USD’s break of 1.3068 minor support argues that the fall from 1.3651 is ready to resume. Focus is now on 1.3026 support. Firm break there will confirm and target 61.8% projection of 1.3651 to 1.3026 from 1.3320 at 1.2934 first. Break will bring deeper decline to 1.2773 key support level. On the upside, above 1.3138 minor resistance will extend the consolidation from 1.3026 with another rise.

In the bigger picture, as noted before, GBP/USD hit strong resistance from the long term falling trend line. Current development is starting to favor that corrective rebound from 1.1946 low has completed at 1.3651. Decisive break of 1.2773 will confirm this bearish case and target a test on 1.1946 low next, with prospect of resuming the low term down trend. Nonetheless, break of 1.3320 resistance will restore the rise from 1.1946 for 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 .

Economic Indicators Update