Markets
Sterling strength was the only highlight in today’s long warm-up routine ahead of US payrolls. April EMU retail sales (-3.1% M/M) are worth mentioning, but that’s it. The payrolls release itself eventually felt like tearing a muscle. The setting was right for a stellar report following two consecutive months of significant ADP employment increases, with weekly jobless claims running at a cycle low and with encouraging signs stemming from the (especially) non-manufacturing ISM. Even the dollar and US real yields finally embraced the better US eco data. Net job gains eventually amounted to 492k compared with the hoped-for 610k and an even bigger whisper number in what turned out to be a huge anticlimax. Some had even hoped to see last month’s 1m+ outcome with a delay. The bigger-than-expected drop in the unemployment rate (5.8% from 6.1%) is an optical illusion resulting from an unexpected decline of the participation rate from 61.7% to 61.6%. Weekly earnings rose more than expected, by 0.5% m/m and 2% y/y. Today’s payrolls report increase the divide between those arguing that a 7.6mn gap remains to get employment back at pre-Covid levels and those saying that the labour market is already much tighter as part of those 7.6mn structurally left the labour cohort. It surely won’t make it easier for the Fed to find consensus on when and how to start reducing monthly asset purchases. The debate will nevertheless start at the upcoming June FOMC meeting based on recent comments by several Fed governors.
The post-payrolls market reaction is telling. US Treasuries are working on completely erasing yesterday’s losses. US yields decline by 1 bp to 3.2 bps at the time of writing with the belly of the curve this time outperforming. Bullion’s comeback suggests that the underlying trend will point to a fresh setback in US real yields. The US dollar is making a similar U-turn, but obviously lower. The trade-weighted greenback changes hands around 90.25 from an open near 90.50. EUR/USD trades at 1.2165, up from the 1.21 big figure earlier today. USD/JPY’s brief spell north of 110 is already over while cable is today’s outperformer, closing in on the 1.4248 cycle high. EUR/GBP approaches the 0.8561 May low. The German yield curve bull flattens with yields falling up to 1.6 bps at the very long end. 10-yr yield spread changes Germany are broadly unchanged with Greece (+4 bps) underperforming. Rating agency Fitch will tonight publish its review of the Italian BBB- credit rating, but there’s no reason to expect the country to be junked.
News Headlines
Canadian job growth disappointed in May. Employment fell a more-than-expected 68k (25k expected) following a 207k decline in April. Job losses were both visible in the full time (-13.9k) and part time (-54.2k) sector and were led by the goods-producing part of the economy (-46.1k). The unemployment rate rose from 8.1% to 8.2% despite a setback in the participation rate from 64.9% to 64.6%. USD/CAD fell but it’s mainly a balance of weakness with the American dollar hit by an even more disappointing payrolls report for a second month straight. The currency pair is changing hands in the 1.208 area.
Flows returned to European credit funds, both investment-grade and high-yield, in the 7-day period from May 27 to June 2, Bloomberg reported based on EPFR data. It was the first net inflow after a few weeks of outflows on concerns of a possible pullback in easy monetary policy by the ECB. Bets on PEPP tapering sent European yields sharply higher during the first three weeks of May after which several ECB members started pushing back against that idea. The central bank is holding its policy meeting next week Thursday.
