Markets Today: Take It Easy

We weren’t alone on Friday thinking that the risks heading into the US employment report were for a disappointing headline non-farm payrolls print

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We weren’t alone on Friday thinking that the risks heading into the US employment report were for a disappointing headline non-farm payrolls print but potentially strong-side surprise on earnings and/or the unemployment rate. Wrong.

In the event, payrolls printed at +242k with 30k worth of upward revision to December and January. While the algorithmic traders dutifully bought dollars and equities and sold rates, the weak average hourly earnings print (-0.1%) limited the back up in 2 year Treasury yields to just 1.6bps on the day while the dollar ended below its pre-payrolls levels.  Equities also have back a big chunk of their morning gains in mid-afternoon, the S&P ending Friday just 0.33% higher. The latter came despite what could be regarded as a near-perfect report for risk markets – alleviating concerns about US growth ‘rolling over’ but with inflation concerns from accelerating earnings growth put back in the box to allow the Fed, in the words of the Eagles, to ‘Take It Easy’ for the time being.

The unemployment rate held steady at 4.9% even though the labour participation rate rose by 0.2% to 62.9%, with the underemployment rate down 0.2% to 9.7%.

The other big news since Friday’s local close was confirmation from China’s NPC that the 2016 growth target would be 6.5%-7% (as previously flagged, but mild relief perhaps that it is not a point target of 6.5% down from 7% in 2015). The inflation target is set at 3% and for urban unemployment, at ‘less than 4.5%’. There might be some disappointment though that the budget deficit target for 2016 is set at 3% of GDP – up from a 2.3% 2015 outcome but foiling suggestions China’s policy makers might be willing to announce fiscal stimulus on a scale that would take the deficit up to 4%.

In FX, the narrow DXY dollar index lost 0.38% to 97.59, the broader BBDXY -0.34%.  AUD (+1.2%) was the third best   performing G10 currency after NZD (+1.3%) and NOK (+1.35%).  AUD closed in NY at 0.7439 and only just back from an intra-day high of 0.7443.  This is the first time back above 0.74 since 10 August 2015 and the best level since 14 July 2015.  A near-5% jump in iron ore prices offered fresh commodity price tailwinds.  EUR/USD was lifted back above 1.10 (1.1005) aided in part by a Market News report suggesting that there was as yet no consensus on the ECB Council for policy action beyond a further cut to the deposit rates (currently -0.3%) when they meet on Thursday.

In US rates, 2year Treasuries finished 2bps higher at 0.86% and 10s 4bps higher at 1.875% (+11bps on the week). Commodities were stronger across the board. Brent and WTI oil were both up by +$1.80 to $38.88 and $36.33 respectively (and some $3.50 on the week).  The LMEX index of exchange- traded industrial metals rallied by 2.5% while iron ore gained $2.60 to $53.75 (up $5.46 or 11% on the week).

Sunday’s CoreLogic RP Data weekend auction market summary shows the combined capital city average clearance rate dropping below 70% for the first time since the start of the year, at 68.1% from 71.4% last week. Melbourne cleared 70.6% of auctions down from 74.8% and Sydney to 68.6% from 72.1%.

Coming Up

In the coming week, we get the customary lull in the US economic calendar.  The key focus is now the ECB and RBNZ meeting decisions (both on Thursday) and to a lesser extent the BoC on Wednesday but where expectations for a rate cut run low.

Locally, the NAB business survey is Tuesday and Westpac’s consumer confidence monthly reading on Wednesday.  The RBA’s Phil Lowe speaks Tuesday. Will he offer an opinion on what he thinks of AUD/USD knocking on the door of 0.75?

Markets go into the RBNZ ascribing about a 25% probability of a quarter-point rate cut, while on the ECB a cut of at least 10bp to the deposit rate is widely expected but with less confidence about what if anything may be agreed beyond that.  Given latest EZ inflation data (-0.2%) and signs of weakening activity (PMIs, German IFO survey) we are minded to expected an increase to the current EUR60bn monthly QE quantum and which encompasses a plan to buy more non-financial corporate debt.

Also important and in the wake of Saturday’s China NPC pronouncements will be latest (February) trade data on Tuesday, CPI/PPI on Thursday, then this coming Saturday industrial production, retail sales and fixed asset investment. Today we should get China’s February FX reserves data.

Overnight

On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +4.04bp to 1.87%. On commodity markets, Brent crude oil +4.45% to $38.72, gold+1.0% to $1,271, iron ore +5.0% to $53.75. AUD is at 0.7406. The range since Friday’s local close has been 0.7340 to 0.7443.

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