US Payrolls Take Center Stage Today

Markets

Yields yesterday at first appeared to be looking for a bottom. In line with national data, EMU May inflation (0.0% M/M, 6.1% Y/Y from 7%) dropped more than expected and this was also the case for the core measure (5.3%). The market reaction was limited. ECB comments were mixed. Chair Lagarde repeated that the ECB still can’t be satisfied with the current inflation outlook and that more ground has to be covered. ECB Villeroy suggested that remaining hikes might be relatively marginal. Bonds were better bid as US markets joined. Wednesday’s comments from Fed’s Harker and Jefferson on a June skip in the hiking cycle obviously triggered a selective market reading on the incoming data. Consensus-beating ADP May private job growth (278k vs 170 k expected) and ongoing low jobless claims (232k) were ‘overpowered’ by a downward revision to Q1 unit labour costs (4.2% from 6%). The figure is interesting, but can hardly be considered as timely news. Yields reversed early gains and a similar ‘biased’ reading occurred aft r the US manufacturing ISM. At 46.9, the headline figure was close to expectations, but both new orders (42.6) and especially prices paid dropped sharply (44.2 from 53.2). Ongoing resilience in employment(51.4) was no valuable counterweight. US yields dropped further (2-y -6.2 bps; 30-y -4.6 bps) with the decline driven by a lower real yield. Chances of a June rate hike are further scaled back (30%). Even July is again put in doubt (72%). German bonds were dragged lower by the US move, easing between 0.1 bp (2-y) and 3.3 bps (5 & 10-y yield). Expectations for a potentially milder Fed filtered through to other markets. After an unconvincing start, equities closed with solid gains (S&P 500 +0.99%, Eurostoxx 50 + 0.94%). The risk-on and lower (US) real yields pushed the dollar off the cliff. DXY closed at 103.5 (from 104.13). USD/JPY gave away the 139 big figure. Even EUR/USD staged a nice comeback (close at 1.0762) after a sluggish performance recently. EUR/GBP closed unchanged at 0.8592.

US payrolls take center stage today. 200k net job growth is expected. Average hourly earnings are seen easing from 0.5% M/M to 0.3% (4.4% Y/Y). The unemployment rate might rise marginally from 3.4% to 3.5%. Considering yesterd y’s market dynamics, the payrolls p obably have to be very strong for markets to reconsider a more hawkish Fed reaction function. Any softer details will only confirm yesterday’s trends. For the US 2-y yield, 4.28% is a first support. The 10-y yield is already testing the 4.64/60% support area (previous highs). Fortunes for the dollar changed too. EUR/USD regaining the 1.0727 area called off the downward alert, opening the prospect for a further technical rebound.

News and views

Australia’s Fair Work Commission after concluding its annual wage review announced a 5.75% raise to the minimum wages. It’s in between the 3.8% business groups called for and the 7% sought by the Australian Council of Trade Unions. The increase follows the 5.2% of last year but is still about 1% below first quarter CPI. According to Fair Work Commission president Hatcher, the decision will affect about one fifth of Australia’s labor force. Though confident that it won’t have a “discernible impact on inflation”, markets are less sure as some analysts predict it will push the wage price index above the central bank’s forecast. The Reserve Bank of Australia meets next week (June 6). Money markets slightly upped their bets for a rate hike at that gathering. A full 25 bps move isn’t discounted until the August meeting though. Swap yields Down Under jump between 4.3 and 8.5 bps with the front underperforming. The Aussie dollar rallies this morning, outperforming peers with the risk-on helping as well. AUD/USD surpasses 0.66.

South Korean inflation came in largely as expected. Prices rose 0.3% m/m to be up 3.3% y/y in April. That’s a deceleration from the 3.7% in May. Core inflation (ex. energy and agricultural products) also eased, from 4.6% to 4.3%, leaving the 5% peak seen in January a bit further behind. Services inflation retreated as well though remained at an elevated 5.6%. This is likely to keep the core gauge supported for quite some time and will force the central bank to retain a hawkish bias for the time being. The Bank of Korea strives for 2% inflation. It held rates steady at 3.50% for the third time straight during its meeting last week but kept the door open for further tightening should prices develop unfavorably while pushing against expectations for rate cuts. South Korea’s won appreciates to the strongest levels since mid-April. USD/KRW drops from 1321.3 to 1306.8 with a generally weaker dollar helping too.