Markets
Global core bonds gain modest ground today. The bond market lost additional ground yesterday in the wake of a less soft signal by Fed chief Powell. Today, investors showed a cautious carving for risk, pushing equities higher and German Bunds lower at the EU opening. EMU CPI’s printed well above the market consensus but had little market impact. US Treasuries continued the downward bias throughout European dealings ahead of the US labour market data. The US payrolls report printed well above expectations, confirming the tight labour market. However, that does not translate into accelerating wage growth yet. Average hourly earnings rose 0.2% (M/M), below the 0.3% (M/M) expectation. Thus, US inflation shouldn’t expect any support of accelerating wages any time soon. The report also didn’t support Powell’s assessment on Wednesday, as he indicated that soft inflation was probably transient. US Treasuries initially lost some additional ground on the strong payrolls, but paired those losses afterwards, nearing opening levels. As US equity markets opened higher, core bonds continued the upward move, entering intraday-gains territory. A disappointing ISM non-manufacturing gauge for April pushed bonds even higher. The US yield curve is moving lower with changes in the range of -1.8 bps (30-yr) and -3.3 bps (5-yr). The German yield curve moves tentatively lower as well, with changes up to -2.3 bps (30-yr). Peripheral spreads over the German 10 yr-yield remains stable.
The post-Fed/Powell USD rebound continued this morning. EUR/USD drifted further south in the 1.11 big figure. EMU CPI printed well above the market consensus. However, European yields were little changed and so was EUR/USD. Markets see this up-tick as mainly due to temporary/seasonal factors. The pair even declined slightly further on ongoing USD strength going into the US payrolls. The report was strong but the tight labour market conditions still didn’t translate into faster wage growth. The market assumes that the Fed will have to maintain a soft wait-and-see stance as long as prices and wage pressure remain soft. This was also visible in the reaction of the dollar. EUR/USD dipped to the 1.1135 area upon the publication of the release but the dollar almost immediately reversed this initial gain. EUR/USD returned to the 1.1150/60 area. USD/JPY was again locked in the mid 111 area. A soft non-manufacturing ISM suggests further dollar profit-taking going into the weekend.
There was no unequivocal story to explain the sterling price action today. The UK currency lost some modest ground against the euro and the dollar this morning, maybe as both the conservative party and labour lost in local elections. The UK services PMI rebounded from 48.9 to 50.4, more or less as expected. The report initially didn’t help sterling but, in technical trade, sterling later reversed initially weakness. EUR/GBP is again trading in the 0.8675 area. Cable regained the 1.30 handle. At least, for now, GBP investors aren’t impressed by yesterday’s ‘warning’ of BoE’s Carney that the market is underpricing the probability of BoE monetary tightening further out.
News Headlines
April payrolls surprised friend and foe with 263k net job creation, beating the already elevated consensus (190k). Previous two months’ data faced a combined 16k upward revision. The unemployment rate fell to the lowest level since November 1969 (3.6%), but against the background of lower participation rate (62.8% from 63%). Wages rose less than expected (0.2% M/M and 3.2% Y/Y) and spoil the payroll party.
Euro area inflation accelerated more than expected in April (1.7% Y/Y for the headline measure and 1.2% Y/Y for the core reading). The pick-up is at least partly driven by Easter-related temporary factors like package holidays.
The UK services PMI rebounded out of contraction territory, rising from 48.9 to 50.4 in April. New business rose from 48.4 to 49 but records a 4th consecutive sub-50 reading. The UK composite PMI rose from 50 to 50.9.
