Markets
Core bond markets fell prey to profit taking today with US Treasuries underperforming German Bunds. Core bonds erased yesterday’s eye-popping gains which came on the back of an Apple revenue warning (stock markets up to 3% lower) and a disappointing manufacturing ISM. Risk sentiment improved overnight following news that China and the US will hold face-to-face trade negotiations early next week. The headlines lifted hopes on a more permanent trade truce between the two economic heavyweights. Monetary easing by the PBOC lifted intraday optimism further. Brent crude simultaneously extended this year’s early comeback, piercing through $57.5/barrel and triggering more core bond profit taking. EMU core inflation stabilized at 1% Y/Y while the headline number fell back to 1.6% Y/Y. Markets didn’t budge. A stellar US payrolls report amplified the split between the current state of the US economy and fears for a growth slowdown going forward. US Treasuries spiked to fresh intraday lows, but investors clearly don’t know how to handle the news. Payrolls at least suggest that current positioning is probably more than soft enough. US equity futures, for what they’re worth, managed to cling on to intraday gains. Fed speakers are a wildcard for the remainder of today’s trading session with Fed Chair Powell, Atlanta Fed Bostic (dove) and Richmond Fed Harkin (hawk) still featuring. US yields add 5.3 bps (30-yr) to 9.9 bps (5-yr). The German yield curve bear steepens with yields currently 0.8 bps (2-yr) to 4.1 bps (30-yr) higher. Peripheral yield spread changes vs Germany are virtually unchanged with Greece and Italy (-4 bps) outperforming.
There were plenty of eco data in Europe and the US today. EMU data were mostly soft. The December composite PMI was downwardly revised (to 51.1) conforming recent evidence of an economic slowdown. EMU inflation also dropped more than expected from 2.0% to 1.6%, drifting from the ECB target. However, this news hardly affected the single currency. A constructive risk sentiment kept EUR/USD close to the 1.14 mark during the morning session. The focus of FX markets was on the US payrolls and, even more, on an joined interview of Fed Powell with its predecessors Bernanke and Yellen. The payrolls report was exceptionally strong. The report was a bit of an ambiguous sign for equities. US yields jumped about 4 bp but USD gains remained modest. EUR/USD dropped to the mid 1.13 area. USD/JPY also succeeded some cautious gains and tries to clear the 108.50 level.
Sterling still traded with a cautious positive intraday bias today. EUR/GBP fully reversed yesterday’s intraday spike in Asia. UK eco data were mixed. The services PMI printed stronger than expected at 51.2 (from 50.4). However, the report still suggests mediocre Q4 growth as Brexit uncertainty continues to weigh on the economy. On the other hand, Nationwide House prices came out lower than expected as were November lending data. EUR/GBP dropped (temporarily?) below the 0.90 mark after the PMI release, but rebounded. Investors are looking out for the next steps in the brexit sage when UK politicians return from the New Year holidays next week. The post-payrolls EUR/USD decline finally pushed EUR/GBP again back to the 0.90 area.
News Headlines
A stellar December payrolls report surprised friend and foe. The US labour market added 312k jobs (vs 184k expected and the previous two month’s numbers received a cumulative 58k upward revision. Wage increases (0.4% M/M & 3.2% Y/Y) outpaced forecasts with the length of the average work week rising from 34.4 to 34.5 hours. The unemployment rate ticked up from 3.7% to 3.9%, but went hand in hand with an increase of the participation rate, from 62.9% to 63.1%, matching the 2014 and 2017 peaks.
The People’s Bank of China will cut the reserve requirement ratio by 0.5 ppt each on Jan 15 and on Jan 25 to offset liquidity fluctuations ahead of Chinese Lunar New Year. Chinese markets are closed from Feb 4 until Fed 10. The central bank estimates that the move will releases a net 800bn yuan ($117bn) of liquidity.
