Markets Today: Synergy

When thinking about a title for today’s note and the impact the US labour market report had on Friday’s session, Aristotle’s quote ” the whole is greater than the sum of its parts” seemed quite fitting, but way too long for a title.

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So there you go, Synergy is the creation of a whole that is greater than the simple sum of its parts.  As far as song titles go, Wales Euro 2016 official song by the Manic Street Preachers “Together Stronger (c’mon Wales)” was also a title contender for today.

US equities opened Friday’s session on the back foot, but a decent US Jobs report, as a whole, triggered a turnaround in sentiment and helped equities end the week on a positive note (S%P +0.35%, DJ +0.32% and NASDAQ +0.60%). The Dow came close to breaking through the 20k mark, but after reaching an intraday high of 19,999.63, it ended the day at 19963. After trending lower in the previous two days the USD recovered a bit of lost ground (DXY+0.69%) and US Treasury bonds sold off with the moves led by the back end of the curve. Fed hike expectations are now at 40% for March after declining to 34% post the Minutes on Thursday and now there are 2 ¼ of hikes priced for 2017, compared to 2 and a bit priced previously.

US payrolls in December printed at 156k, below the 175k expected by consensus, however given the +19k revisions to the previous months, we still ended up with a net rise of 175k job for the month. The unemployment rate rose one-tenth to 4.7% as expected, but on a positive note the rise in the unemployment rate was in part due to a slight increase in the labour force participation rate to 62.7%. Average earnings rose 0.4% mom and because a +0.0% monthly figure was seen in Dec-15, the annual rate rose to 2.9%; the highest rate of growth in the post-GFC period. So as whole, the US labour market report for December was pretty solid, there are more people in work, the pool of available labour is rising and wages are also going up.

Looking at currencies in more detail, the USD was stronger across the board with JPY leading the losses amongst G10 currencies. USDJPY gained 1.5% on Friday and it is currently trading at 117.02. GBP lost 1.2% and today it is down another 0.35% following weekend comments from PM May that the UK will leave the EU single market and that she is not interested in keeping “bits of EU membership”. AUD also came under pressure post NFP (down 0.5%) but relative to other G10 currencies it was the second best performer (currently trading at 0.7294). In contrast, NZD fell 0.94% and now trades below the 70c mark after spending most of the previous 24hrs with a 7 in front of it. CAD was the outperformer (-0.09%) supported by better than expected jobs data (+53.k job vs -2.5k expected)

Over the weekend we also learned that China’s FX reserves fell by $41bn to $3.01trn in December, fairly close to analysts’ expectations. Nevertheless, if we assume China’s trade balance in December (due for release Friday) was close to the average seen over the previous three months (~ $45bn) while also considering currency valuation effects, we estimate that the PBoc FX intervention in December was probably close to $75bn. So pressure on the Renminbi was still significant in December and it remains to be seen if the recent introduction of new capital controls will help ease this downward pressure on the currency in 2017.

In other news Chicago Fed’s Evans (voter, dove) said that 3 hikes is ”not implausible”, however there are also downside risks. Cleveland Fed Mester (non-voter, hawk) said that three hikes this year is a reasonable number, while Philly Fed Harker (voter, neutral) noted that he was also in the 3 hikes camp for 2017.

Lastly CFTC data showed that speculators increased their net long USD notional positions to $25.4bn from $24.17bn as of January 3. The $1.26bn USD gain was largely driven by increases in short positions against most currencies with EUR and GBP recording the largest increase in short contracts (9.7k and 7.2k respectively).

Coming Up

Last week we learned in yet another Donald Trump tweet that he plans to hold a press conference on Wednesday this week. It is likely the conference will revolve around how Trump plans to distance himself from his business empire while in office (in December he cancelled a conference on this issue), but any policy comment could be important for markets.

US Fed Chair speech on Friday could also be another important event. Yellen is expected to briefly talk about the Fed System’s mission and responsibilities, but there will also be a Q&A session.

As for this week’s data highlights, the US gets JOLTS job opening on Tuesday and business inventories, PPI and retail sales on Friday.  Eurozone unemployment data is out tonight and Industrial production is released on Thursday. Today China gets PPI figures while Yuan loans and Money Supply are out tomorrow. Japan’s Trade balance will be released on Wednesday and retail sales are the data highlight in Australia, out on Tuesday. The markets is currently looking for a 0.4% outcome, down from 0.5% in November, but NAB economists have an above consensus print of 0.7%, thanks to an extra boost from Black Friday sales.

Overnight

On global stock markets, the S&P 500 was +0.35%. Bond markets saw US 10-years +7.50bp to 2.42%. In commodities, Brent crude oil +0.37% to $57.1, gold-0.7% to $1,173, iron ore -3.4% to $76.25, St. Coal -2.6% to $83.50, Met. Coal -3.3% to $206.00. AUD is at 0.7294 and the range since Friday 5pm Sydney time is 0.729 to 0.7352

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