Markets
We’ll jump straight to today’s main event: stellar US payrolls! Or at least that’s what markets were expecting. The actual figure of 266k job growth didn’t even come near to the one million consensus. To make it even worse, last month’s 916k was revised down to 770k. April job gains all came on the back of the services sector as goods-producing employment declined with 16k. Leisure and hospitality were the main contributor with a solid 331k new jobs, followed with great distance by financial activities (+19k). Trade (-81k) and professional and business services (-79k) tempered the headline services figure though. The unemployment rate unexpectedly rose from 6% to 6.1%. That it is accompanied by a stronger increase in the participation (from 61.5% to 61.7%) is nothing but small comfort. Hourly earnings rose 0.3% y/y but it is hard to draw any conclusions because of the heavily distorted reference base (the figure spiked to 8.2% in April last year). The huge job miss leaves many analysts scratching heads. Some refer to recent comments from company officials highlighting challenges in filling open positions. Fed member Kashkari shortly after the payrolls report indeed said there are people who are holding off re-entering the job market, amongst others because of “massive childcare shortages”. He added that today’s report validates the central bank’s outcome-based approach. Whatever the reason, the disappointment triggered a kneejerk reaction in markets. US Treasury yields tanked more than 10 bps at some point. Most losses occur at medium tenors in a sign investors are scaling back bets on premature Fed policy rate hikes. This makes sense given that closing the gap of some 7.6 mn jobs at an April pace will take a lot more time than previously envisioned. Put differently: the Fed and its soft approach just regained some credibility. US yields drop 1.5 bps (2y) to 5.5 bps (5y). The US 10y yield temporarily breached the April low around 1.52% but recovered most losses in a fairly short amount of time. German yields rose in early European trading hours after ECB governing council member Kazaks floated the possibility of slowing bond purchases at the next meeting in June, provided the economic outlook does not deteriorate and financing conditions remain favourable. The latter does not mean however that the ECB will react to whatever yield increase, because “at some point [yields] will need to rise”. He added that it might not be needed to spend the entire envelope (PEPP). That upleg soon reversed in the wake of the job report of course with German yields now down 1.5 bps (10y) to 2.1 bps (30y). Kazak’s comments also sparked a peripheral bond selloff, causing spreads vs. Germany to increase 3 to 6bps (Italy).
Needless to say the dollar suffers on FX markets. The trade-weighted greenback fell from 90.95 to an intraday low of 90.35. Kazaks’ minor boost in EUR/USD to 1.208 this morning was about to fade completely before the payrolls were released. The duo came near to the 1.215 resistance (April high) but for now trading just north of 1.21 will have to suffice. USD/JPY ditched the 109 again. Sterling remained under minor selling pressure today in the wake of the Bank of England that turned out less hawkish than expected and ahead of key parliamentary election results in Scotland. First indications are expected later today with the final outcome due tomorrow. A nervous pound loses against the euro (EUR/GBP flirting with 0.87) but limits losses vs. a weak dollar.
News Headlines
Canadian payrolls showed a 207.1k net job loss in April, slightly more than the 150k expected. Details showed that the lion share of job losses were full time occupations (-129.4k) with part time professions shrinking by 77.8k. The unemployment rate rose slightly more than feared, from7.5% to 8.1% and this occurred in combination with an unexpected setback in the participation rate (64.9% from 65.2%). Hourly wages declined by 1.6% Y/Y. Both dollar and loonie weakness keep each other in check after the release with USD/CAD volatile between 1.2150 and 1.22. The Canadian dollar is losing out to the euro though. EUR/CAD gains one big figure from 1.47 to 1.48 ending the sell-off since mid-April.
