- European equity markets joined WS and Asian optimism and currently trade around 0.5% higher with the German Dax outperforming (+1.5%). US equity markets opened nearly unchanged despite the disappointing payrolls report.
- May US payrolls disappointed. Net job growth was 138k, down from 174k in April and below 182k consensus. The previous two months’ numbers were downwardly revised by 66k. The unemployment rate declined to 4.3%, the lowest level since early 2001, but it was mainly due to a decline of the labour force participation rate. Average hourly earnings stabilized at 2.5% Y/Y while consensus expected an acceleration to 2.6% Y/Y.
- International anger at Trump’s decision to withdraw from the Paris climate agreement has been led by the US’s closest G7 allies, with Germany, France and Italy warning that they are unwilling to renegotiate the treaty. UK PM May abstained from the statement and indicated she believed policy on climate should be left to Washington.
- Oil prices extended losses to hit a three-week low, after rising U.S. production and President Trump’s withdrawal from the Paris Climate Accord overrode the fall in crude inventories there. Brent crude dropped below the psychological $50/barrel mark.
- British construction activity grew at its fastest rate since the end of 2015 last month, as a pick-up in house building helped builders shake off a lacklustre start to the year. The Markit/CIPS construction PMI jumped to 56.0 from 53.1, its highest since December 2015, way above 52.6 consensus.
Rates
Disappointing payrolls push US 10y yield to 2.16%
Global core bond trading was uneventful, as usual, ahead of the US payrolls report. A disappointment across the line lifted core bonds with US Treasuries outperforming German Bunds. The US 10-yr yield tested key support at 2.16%, but a break didn’t occur. The payrolls weren’t that bad that they question a June rate hike. However, investors may at one point put the Fed’s tightening intentions in doubt if data continue to disappoint in H2 2017, which is not our base scenario. At the time of writing, US yields drop 1.2 bps (2-yr) to 3.8 bps (10-yr). Changes on the German yield curve range between -0.8 bps (2-yr) and -2.3 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany barely moved with Portugal underperforming (-5 bps).
The US economy created 138k jobs in April, below 182k consensus. The previously two payrolls numbers were downwardly revised by 66k, implying a total negative surprise of 110k which is very significant. Average hourly earnings stabilised at 2.5% Y/Y, while consensus expected an acceleration to 2.6% Y/Y. That’s also disappointing in the current environment where the Fed reached its full employment target, but not its price stability target. The unemployment rate unexpectedly dropped to 4.3%, the lowest level since early 2001, but that was mainly due to a decrease in the labour force participation rate. Overall, it was a disappointing payrolls report.
Currencies
USD rebuffed on disappointing payrolls
The US payrolls were the dominant factor for FX trading. They missed consensus by quite a big margin and triggered a new wave of USD selling. EUR/USD extensively tested the 1.1268 area. No sustained break occurred yet, but the heat is still on. USD/JPY also fell off a cliff. The pair almost lost a big figure and trades in the 110.60/70 area. The dollar isn’t out of the woods yet.
Overnight, yesterday’s US equity rally continued in Asia with Japanese indices taking the lead. There were plenty of headlines on the BOJ’s balance nearing the JPY 500 trillion milestone. However, it hardly weakened the yen. USD/JPY touched an intraday top in the 111.68 area, but the decline of the yen remained modest given the equity performance. EUR/USD (1.1220 area) was little changed from yesterday’s close.
European equities joined the risk rally from the US and Asia. However, there was hardly any fall-out on yields or the FX markets. Interest rate differentials between the US and Europe/Germany barely changed. EUR/USD held a tight range in the low 1.12 area. Despite a good equity run, USD/JPY even declined slightly off the Asian top despite the equity rally and settled in the mid 111 area, awaiting the US payrolls release.
The US payrolls brought quite a significant miss. Taking into account the revision of the previous months, job creation was 110K lower than expected. Wages (2.5% Y/Y) were marginally softer than expected. The unemployment rate declined to 4.3%, but for the wrong reason (lower participation rate, decline labour force). The market reaction was straightforward. US yields and the dollar declined. The setback of equities (futures) remained modest. EUR/USD extensively tested the 1.1268 recent top. This test is ongoing. USD/JPY also fell off a cliff. The pair changes hands in the 110.75 area. No technically important levels area broken, but the picture is again becoming heavy.
EUR/GBP retests the recent highs after the payrolls
Sterling trading initially showed no clearer trend today and was confined to rather tight ranges. The construction PMI was surprisingly strong at 56.00 (from 53.1 (vs. 52.6 expected). However, as was mostly the case of late, good UK eco data were unable to counterbalance political uncertainty. A Ipso Mori poll also indicated that the lead of the Conservatives over Labour had declined to 5%., keeping sterling in the defensive. In the afternoon, cable underperformed EUR/USD as the dollar was sold after the US payrolls report. EUR/GBP is currently again testing the recent highs in the mid 0.87 area. Cable temporary spiked to the 1.2 area, but the gain could not be sustained. The pair trades currently again in the 1.2870 area, a level that was also on the screens this morning before the US payrolls.
