- European equities trade narrowly mixed with Madrid underperforming due to increasing political tensions. Also US equities trade sideways, near yesterday’s closing levels.
- US job creation rebounded in October, but wage growth came in below economists’ estimates. Employment rose by a net 261,000 last month, marking the biggest monthly job gains since July 2016. The unemployment rate unexpectedly dropped to 4.1%, but average earnings disappointed as they stabilized instead of increasing 0.2% M/M.
- Growth in the US services sector continued its upward march in October, providing evidence that the world’s most important economy remains on course in H2 of 2017, despite the damage caused by the hurricanes. The non-manufacturing ISM came in at a very high 60.1 in October, confounding expectations for a decline to 58.5.
- The UK’s vast services sector posted its best rise in activity since April this year, propelled by "resilient client demand" and "improved order books", according to a closely watched poll released on Friday. The headline index rose 2 points to 55.6.
- Ben Broadbent, deputy governor of the BoE sought to reinforce the central bank’s message that it had not gone soft on future rate rises on Friday, saying "we will need a couple more interest rate rises".
Rates
US payrolls cannot give bonds a distinct direction.
US October payrolls were a mixed bag, giving investors a too diffuse picture to place new big bets. US Treasuries spiked modestly higher for a short period of time, as lower average earnings were considered as the key lesson out of the report. However, the report was even handed and soon US Treasuries were again at pre-payrolls levels. Later, the Non-manufacturing ISM business confidence surprised, as the headline index even rose to 60.1 instead of falling to 58.5. US Treasuries now tried to go lower, but also the downside was blocked. German Bunds moved sideways today, but with a slightly positive bias. It tried a few times to take out first resistance (162.78/83) and the test isn’t over. Anyway the key resistance stands at 163.43.
At the time of writing, the German yield curve has bull flattened softly with yields down between 0.4 bp and 1.4 bps. The US yield curve is narrowly mixed with yields varying between +0.9 bp (2-yr) and -0.3 bp (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany are virtually unchanged with Greece underperforming (+6 bps) on profit taking, following a sharp narrowing in the previous two days (-39 bps).
The headline US payrolls gain of 261K in October fell short of the 313K expected, but an upward revision of 90K in the past two months compensated for the miss. The unemployment rate fell unexpectedly to 4.1%, while a stabilization at 4.2% was expected. However, the unemployment rate beat was (more than) compensated by lower than expected average hourly earnings. These were flat (instead of up 0.2% M/M) following a 0.5% M/M increase in September. The sensitivity of markets for wage growth (inflation) is great as it will play a big role in future Fed policy.
Currencies
Dollar going nowhere on mixed payrolls
Today, the focus was on the US payrolls. However, the report was a mixed bag and failed to give clear guidance for USD trading. A strong US non-manufacturing ISM was slightly supportive for the US currency. EUR/USD trades in the 1.1630 area. USD/JPY again tries to regain the 114 barrier. In a broader perspective, the dollar holds to the tight ranges od previous days.
Overnight, Asian equities showed modest gains. Tech stocks were supported by strong earnings from Apple published after the WS close. USD/JPY was little changed in the 114 area in light trading conditions (Japanese markets were closed). EUR/USD held a tight range in the 1.1650/70 area.
There were no data with market moving potential in Europe. Sentiment on risk was cautiously positive and the dollar gained marginally ground as investors looked forward to the US payrolls report. Interest rate differentials hardly changed. If anything there was a marginal widening in favour the dollar.
The US payrolls were a mixed bag. September job growth (261 000) was below consensus, but including upward revision of the previous two months, the figure was broadly as expected. The unemployment rate declined to the very low level of 4.1%. On the other hand, wage growth disappointed again at 0.0% M/M and 2.4% Y/Y. US interest rates and the dollar dropped temporary upon the disappointing wage data, but the USD and rates decline was reversed soon. Mid-morning in the US, the ISM non-manufacturing unexpectedly rose to a very strong 60.1 from 59.8 (58.5 was expected). The dollar gained a few more ticks. EUR/USD trades currently in the 1.1630 area. USD/JPY is changing hands in the 114.15 area. So, the dollar trades with a marginal gain in a daily perspective, but holds within this week’s extremely tight sideways range.
Sterling rebounds slightly on strong services PMI
Yesterday, sterling was hammered as the BoE signaled that two additional rate hikes would be sufficient for inflation to return close to the 2% target at the end of the 2019/20 policy horizon.
Today, the UK services PMI unexpectedly improved from 53.6 to 55.6 (53.3 was expected). The UK composite PMI also improved substantially from 54.1 to 55.8, indicating that UK growth might be decent at the start of the fourth quarter, despite ongoing uncertainty on Brexit. EUR/GBP traded in a narrow range near 0.8925 in the run-up the PMI publication. Initially, the sterling gains were very limited. Investors assumed that even a better-than-expected performance in the key services sector was not enough to change the BoE assessment anytime soon. During the US trading session, sterling gradually captured a better bid. EUR/GBP trades currently in the 0.89 area. Cable spiked temporary higher upon the publication of the US payrolls, but this USD move was soon reversed. The pair trades in the 1.31 area (from 1.3059 at the open this morning).
