Markets
Global sentiment remained constructive in Asia this morning. However, interest rate markets took a breather after yesterday’s sharp rise in yields. In line with recent eco evidence, German July production again printed at an awful ‑0.6% M/M and -4.2% Y/Y. German/EMU yields returned a small part of yesterday’s rise in European dealings this morning. Still, we assume this was merely a setback after yesterday’s violent move, rather than a reaction to German data. European equities maintained a cautious upward bias going into the publication of the US payrolls report. Given recent movements, a clear signal from the payrolls had the potential to confirm (or reject) recent price action. However, the report brought a diffuse message. Job growth disappointed, but wage growth accelerated markedly and the household survey (workforce, participation rate etc) was also strong. The door remains open for another 25 bps pre-emptive Fed rate cut in September, but there is no dramatic deterioration of the US labour market. At the moment of writing changes in US yields are less than 1 bp, with the very long end marginally outperforming. One might also expect that Fed Chair Powell has little reason to unsettle market positioning when he speaks later today. The German yield curve bull-steepens with the 2y yield little changed and the 30y declining 6 bps, a corrective move after yesterday’s sharp rise. 10-y intra-EMU spreads versus Germany narrow a few bps with Italy outperforming (-5bp) and Greece underperforming (+3bp).
Changes in EUR/USD were small compared to earlier this week. The pair lost modest ground this morning, but the payrolls were not strong enough to support further USD gains. EUR/USD reversed the earlier ‘decline’ and currently trades near the highest level of the day (1.1050 area), but below yesterday’s peak (1.1080/85 area). USD/JPY initially tried to hold north of 107, but lost a few ticks after the payrolls (currently 105.75 area). The UK political debate has shifted to (the timing) of new elections. The opposition isn’t prepared to approve new elections before they are sure of a Brexit delay. This might lead to a new (temporary) political standstill and potential uncertainty. Sterling is losing marginal ground against the euro (EUR/GBP 0.8970 area). Cable stabilizes in the low 1.23 area.
News Headlines
Net US job growth rose by 130k in August according to the latest Payrolls report. Consensus expected an increase by 160k. The June and July numbers faced a combined 20k downward revision. August details showed that hiring for temporary-help positions and weekly working hours strengthened. The manufacturing sector added only 3k jobs while retailers cut jobs for a seventh straight month. Average hourly earnings rose by more than forecast, respectively 0.4% M/M and 3.2% Y/Y. The unemployment rate stabilized at 3.7%, but the participation rate increased from 63% to 63.2%, matching the highest level since 2013.
The PBOC will cut the required reserve ratio for all banks by 0.5 percentage point to the lowest level since 2007. The Chinese central bank also cut the reserve ratio by 1 percentage point for some city commercial banks. They stressed that it wasn’t a massive step-up in monetary easing. The RRR cut will offset the tax season in mid-September, and the overall liquidity in the banking system will stay basically stable.
USD/CAD fell below 1.32 following the Canadian payrolls report. Net job growth rose by 81.1k vs 20k consensus. Details showed contributions from both full (+23.8k) and part time (57.2k) jobs. Wage growth disappointed (3.8% Y/Y vs 4.5% Y/Y) while the unemployment rate stabilized at 5.7%. The participation rate increased to 65.8%.
