Markets
The return of Chinese investors marked the start of a positive risk rally at the beginning of this week. The move showed early signs of fatigue yesterday and grinded to a halt today. Asian and European stock markets fell prey to slight profit taking, losing 0.5% to 1%. National EMU production and trade data (Germany and France) confirmed the grim economic picture at the end of last year. Core bonds retained yesterday’s minor upward bias.
The dollar felt vindicated following yesterday’s technical breaks (98.5 resistance for trade weighted dollar and EUR/USD 1.10 support area) and resumed its run going into the January US payrolls report, today’s sole highlight. Wednesday’s stellar ADP employment report raised the bar of expectations beyond the expected 165k. The US economy eventually added 225k jobs in January while the previous two month’s data enjoyed a combined 7k upward revision. Weather-sensitive sectors like construction showed exceptional job gains thank to relatively warm weather. Education and health services employment added 72k, while transportation and warehousing rose by the most in a year. The US unemployment rate ticked up from a multidecade low of 3.5% to 3.6%, but went hand-in-hand with an unexpected increase in the labour force participation rate, from 63.2% to 63.4%, the highest level since the Summer of 2013. Average hourly earning printed near consensus at 0.2% M/M and 3.1% Y/Y. Overall we label the jobs report as strong, but insufficient to rejuvenate the risk rally on stock markets.
US Treasuries made a kneejerk reaction lower, but rapidly returned to pre-payrolls levels. The US yield curve bull flattens with yields 2.4 bps (2-yr) to 6 bps (30-yr) lower. The German yield curve shifts in similar fashion with yields declining 0.6 bps (2-yr) to 3.6 bps (30-yr). 10-yr yield spread changes vs Germany barely changed with Greece (-6 bps) outperforming.
The dollar for once is exception to the rule and holds its positive momentum. EUR/USD changes hands around 1.0950, the softest level for the pair since mid-October. USD/JPY is stuck between risk sentiment and beneficial US eco data and holds its territory just south of 110.
Sterling’s trading session was one to rapidly forget about. EUR/GBP slightly followed EUR/USD south, trading around 0.8475. Attention shifts this weekend to Berlin, where national coalition partners CDU and SPD meet to discuss developments in Thuringia, where extreme-right AfD helped elect the regional president. The latter already vowed to hold fresh regional elections though.
News Headlines
Canada’s economy added 34,500 jobs in January, all in full-time work, beating more than twice expectations for 17,500 new jobs. The details show the goods-producing sector added 15,000 positions while the service sector shed 14,500 positions. The unemployment rate dropped from 5.6% to 5.5%, but the participation rate fell as well (to 65.4%). Hourly wages accelerated unexpectedly to 4.4% Y/Y.
The Russian central bank as expected delivered a sixth round of monetary easing, slashing its policy rate from 6.25% to 6%. Governor Elvira Nabuillina acknowledged disinflationary risks (e.g. subdued external demand hurting exports) overshadow pro-inflationary risks, with the outbreak of the coronavirus an additional source of uncertainty. The central bank signaled a dovish stance, indicating it’s willing to cut rates below 6% if inflation (2.4%) continues to retreat below the 4%-target.
Norway’s mainland economy, excluding the volatile oil sector, grew at a meagre pace of 0.2% (Q/Q) in Q4/2019 while economists forecast a 0.3% acceleration. The details show a drop in imports (-0.8%) and weaker domestic demand (-0.8%). The weaker than anticipated GDP print, confirms recent signs of frailty (e.g. weaker inflation, manufacturing and employment data).
