Headlines
European stock markets didn’t lose additional ground after a risk-off opening following the US’ missile strike against Syria. US stocks also trade narrowly mixed, ignoring an ambiguous payrolls report.
March net job growth increased by 98k, way below market consensus of 180k while the previous two month’s numbers were downwardly revised by 38k. The unemployment rate unexpectedly declined from 4.7% to 4.5% while average hourly earnings rose by 0.2% M/M and 2.7% Y/Y, in line with forecast.
Greece’s international creditors have hailed progress on the reforms demanded of the country, saying the "big blocks" to releasing bailout cash to Athens had been cleared. Eurogroup Dijsselbloem confirmed a deal had been struck on the reforms demanded of the left-wing government in return for its latest tranche of rescue cash.
UK manufacturing and construction unexpectedly shrank in February, adding to signs that the economy lost momentum in the first quarter. Factory output fell 0.1% from January. Total industrial production declined 0.7% as unseasonably warm weather reduced demand for energy. Construction dropped 1.7%, the most in almost a year.
German industrial output surged in February (2.2% m/m) and the trade balance swelled (€19.9B) as the engine room of Europe’s largest economy fired on all cylinders to satisfy robust foreign demand that is assuaging angst about rising protectionism.
Sweden should start planning for how to deal with the end of its quantitative easing programme, Riksbank deputy governors Ohlsson has said, in a notable shift of tone from the central bank’s recent dovishness in official statements.
The Czech central bank’s foreign currency reserves soared by a record €17.1B in March, reaching 70% of GDP as the central bank intervened heavily to defend its weak-crown policy. The bank lifted the EUR/CZK 27 peg yesterday after nearly three and a half years which saw a total of around €73B in interventions.
China’s foreign exchange reserves rose again in March but by less than expected as authorities in the world’s second largest economy fight with halting capital outflows and have seen a stabilisation in the renminbi this year.
Fitch has become the second major ratings agency this week to cut the South African government’s sovereign credit rating to junk status (BB+), after the ousting of respected finance minister Pravin Gordhan knocked confidence in President Jacob Zuma’s commitment to sound economic policies.
Rates
Test of key US yield support fails twice
The US 5-yr and 10-yr yield tested key support, respectively at 1.8% and 2.3% on two separate occasions today. The test failed twice, suggesting that yields could move back higher, more comfortable within their trading ranges (1.8%- 2.14% for 5 yr and 2.3%-2.64% for 10yr). The first test occurred overnight after the US conducted missile attacks against Syria. The initial risk-off move cross markets (including higher opening for the Bund) didn’t gain traction during European dealings. Markets retreated going into the US payrolls report, amid strong German production data. A disappointing headline March payroll number triggered a second, more intense test of key support levels. Job growth disappointed by 130k, taking into account downward revisions to the previous two month’s numbers. An unexpected decline of the unemployment rate, to 4.5% (lowest since May 2007) countered the weak headline reading. Average hourly earnings also printed in line with forecasts (0.2% M/M, 2.7% Y/Y). A break lower in yield terms eventually didn’t occur, sending (US) yields back higher. The jury is still out, but we think that this one-off payrolls’ miss won’t derail the Fed’s normalization intentions, suggesting higher yields.
At the time of writing, the German yield curve bull flattened with yields 2.5 bps (2-yr) to 3.8 bps (30-yr) lower. Changes on the US yield curve range between – 0.1 bp (2-yr) and -2.9 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany 10-yr yield vary between -2 bps and +1 bp with Greece outperforming (-18 bps). Greece reached a deal on economic reforms with its bailout monitors, paving the way for the payout of the next bailout tranche.
Currencies
USD: no negative fall-out from mediocre payrolls
The events in Syria had little impact on European trading in general and on the dollar in particular. The dollar held tight ranges going into the US Payrolls. The report was mixed to slightly softer than expected. The dollar dropped briefly lower immediately after the report, but the losses were soon reversed. USD/JPY survived another test of the lows and is again trading in the high 110 area. The US currency even succeeded small gains against the euro with EUR/USD changing hands in the 1.0620 area.
Overnight, Asian markets were hit by a (temporary?) risk-off reaction on the US missile strike against Syria. Markets followed the ‘standard risk-off procedure’. Equities and US bond yields declined. The yen rebounded. The oil price jumped as markets feared more instability in the region. However, the reaction was limited and an important part of the moves was already reversed at the European market opening. USD/JPY dropped close to the recent lows in the low 110 area, but the test was again rejected and the pair returned to the 110.60 area. EUR/USD was little changed in the 1.0650 area.
On the newswires, there were plenty of news articles and analysis on the consequences of the US strike against Syria. However, for markets in general and for FX trading in particular, it was basically a non-event. Equities opened slightly lower but without follow-through selling. USD./JPY settled in an extremely tight sideways range in the 110.60 area. The dollar even gained slightly ground during the morning session, drifting to the 1.0630 area.
The US payrolls were unable to give clear guidance for USD trading. The headline figure showed a unexpectedly sharp slowdown in payrolls growth (89K from 221k, 170k was expected). However the unemployment rate declined to the lowest level in almost 10-yr (4.5%). The dollar (and other markets) initially reacted briefly to the poor headline figure. USD/JPY again tested the recent low below 110.20. EUR/USD spiked to the mid 1.06 area. However, the USD downside was blocked. Core yields also reversed an initial spike lower, further supporting the dollar. USD/JPY trades currently just below 111. EUR/USD is changing hands in the 1.0620 area. In a broader perspective, the USD gains are negligible, but USD-bulls might get some comfort as the USD avoided losses on a mediocre report. To be confirmed.
Sterling loses slightly ground after poor UK data
There were plenty of eco data on the UK eco calendar today including the Halifax House prices, the output data and the external trade data. They were not the most important ones and some of them could be considered as a bit outdated. Even so, each of the data series came out weaker than expected. It was enough to trigger a modest correction of sterling. EUR/GBP rebounds to the 0.8550/60 area. Sterling lost slightly further ground after the payrolls, driven by the comeback of the dollar. Cable dropped below the 1.24 big figure. In this move EUR/GBP gained a few more ticks (currently in the 0.8570 area).
