Markets
The spotlight turned from yesterday’s dovish ECB meeting to the May US payrolls report. Net job creation disappointed, in line with Wednesday’s private sector ADP report. The total miss was 175k (!!), taking into account revisions to the previous two month’s data, with average hourly earnings also missing the bar. The data added to recent repositioning bets in favour of a Fed rate cut cycle, starting in Q3 2019. US yields plunged towards this week’s low, retesting important support levels like 2.06% for the US 10-yr yield. We don’t anticipate breaks lower and even consider some profit taking on core bond long positions going into the weekend. The US yield curve bull steepens in the process with yields down 7 bps (2-yr) to 3.9 bps (30-yr). German yields lose between 0.9 bps (5-yr) and 2.7 bps (30-yr) today. German industrial production figures for April were awful (-1.9% M/M) and indicate a dismal start to the second quarter. The Bundesbank downgraded this year’s growth forecast to 0.6%. 10-yr yield spreads vs Germany narrowed up to 2 bps with peripheral bonds outperforming (Italy: -16 bps, Greece: -8 bps, Spain/Portugal -6 bps). The peripheral outperformance is thanks to yesterday’s hints from ECB Draghi that the ECB will revamp asset purchases if adverse contingencies arise.
The euro traded resilient yesterday even as the ECB signaled that rates will stay low for longer. ECB president Draghi even kept the door open for further easing if needed. However, it didn’t hurt EUR/USD. The pair maintained recent gains holding in the 1.1250/1.13 area as the as the dollar remained weak on Fed rate cut expectations. EUR/USD held that trading range this morning as investors were looking forward to the US payrolls release. In line with the ADP report earlier this week, job growth missed the consensus by quite a big margin. US yields end the dollar nosedived again. EUR/USD cleared recent highs just north of 1.13 and tested the 1.1324 resistance (April top). Next resistance comes in at the 1.1448 area (correction top/50% retracement). The German 10-y yield also set a new all-time low, but that didn’t stop the EUR/USD topside momentum. USD/JPY also tumbled form the mid 108 area to currently trade below the 108 barrier. USD momentum is becoming ever more fragile.
As was the case during most of this week, sterling trading was mostly technical in nature and tracked the broader moves in the euro and the dollar. UK PM May today formally steps down as leader of the conservative party, but for now there is no clarity on who will succeed her and on what Brexit tactics this new PM will follow. EUR/GBP initially dropped to the mid 0.88 area, but the pair rallied in lockstep with EUR/USD after the US payrolls. The EUR/GBP 0.89 level is again within reach. Cable gained some further ground on post-Fed USD weakness, but gains remains modest (currently 1.2740 area).
News Headlines
The Canadian job report crushed expectations in May. Net employment amounted up to 27 700 (all of which full time) while a much more modest 5 000 was expected after an already historic increase (106 500) in April. Wages grew at a pace of 2.6% (unchanged vs. April). Markets anticipated a slight pullback to 2.4%. The loonie rallied to below USD/CAD 1.33.
US payrolls were a disappointment in May. After a strong (but downwardly revised) April figure, 75 000 new jobs were created in May (vs. 175 000 expected). The unemployment rate and participation rate stabilized at 3.6% and 62.8% while wage growth was unchanged at 0.2% MoM. An uptick to 0.3% MoM was expected.
