January 8, 2018

Markets Today: 8 January 2018

A mixed US labour report and softish ISM non-manufacturing print had minimal impact on the USD and US Treasury yields while global equities have continued on their merry way higher amid a supportive global economic backdrop.

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  •  Strong Canadian Jobs were the big data surprise on Friday propelling the Lonnie to the top of the G10 leader board (+0.60%) and the AUD is essentially unchanged after commodities had a mixed end to the week.
  • The December US nonfarm payrolls number came in at 148k vs 190k exp., but after the solid ADP report on Thursday (250k) many were looking for a print above the 200k mark. Average hourly earnings printed in line with expectations at 0.3%mom taking the yoy number to 2.5% (November was revised lower to 2.4% from 2.5%) and the unemployment rate held steady at 14.1%, a 17 year low.
  • The knee jerk reaction to the US labour data triggered a dip in the USD and UST yields, but the move proved short lived. The story remains relatively unchanged, the US labour market remains solid and the monthly rise in average hourly earnings points to a steady rise in wage growth which should keep the Fed on track for 3 hikes this year.
  • So in the end the USD closed Friday little changed in index terms. Against G10 currencies, the CAD jumped 0.60% after a very solid labour market report which revealed 78k jobs were created in December vs 2k expected by the market. Canada’s unemployment rate dipped 2 tenth to 5.7%, a new 41 year low and the CAD briefly touched 1.2375, a three and a half month low. CAD opens the week at 1.2413.
  • The AUD traded in a 0.7835 -0.7875 range on Friday and currently trades at 0.7860, its eight consecutive day with a 78 handle. Mixed commodities performance on Friday were a factor hindering the AUD with oil prices retracing some of the previous days’ gains (WTI -.0.9%, Brent -0.7%). Copper (-0.9%) and Aluminium (-2.1%) also had a day to forget, but iron ore gained 1% and climbed above the $75 mark for the first time since February 2017 (TIO Futures). So for now the AUD remains unable to break above the 0.7880/90 resistance level (October highs), Australia’s retail data on Thursday could be the local trigger and offshore data releases on Friday are the ones to watch (see more below).
  • NZD climbed 0.27% on Friday, but remains unable to break above the 72c mark. After trading to an overnight high of 0.7192, the kiwi opens the week at 0.7169. The Euro has also been unable to break above its key resistance level of 1.2090 and after briefly rising on the non-farm payrolls USD dip, the pair closed the day down 0.32% and currently trades at 1.2027. USD/JPY managed to closed above the ¥113 mark, but relative to our model it continues to lag the move in equities and UST yields.
  • 10Y UST yields closed the week at 2.47% after briefly trading down to 2.43% intraday. Meanwhile the 2y rate held steady at 1.96% with the UST curve little changed in the end. 10y Bunds were also unchanged at 0.439% and 10y Gilts climbed 1bps to 1.244%
  • In other news/data releases
    • The December ISM non-manufacturing printed below expectations and 1.5points lower than the previous month ( 55.9 vs 57.6 exp.). The decline in the headline number was driven by significant declines in business activity and new orders growth
    • China’s foreign-exchange reserves printed another increase, marking the 11th consecutive monthly gain. Reserves increased $20.7 bn to $3.14tr in December, just above the $3.13trn expected. Tighter capital controls and a steady economy have certainly helped in this regard.
    • Fed Williams (voter) said on Saturday that 3 hikes in 2018 make sense. Noting that “We’re in a pretty good situation: the economy is doing great, everyone expects us to raise rates gradually.”  And then adding that “I’m not worried about inflation suddenly taking off”
    • President Trump said on Sunday that  he would “absolutely” be willing to talk on the phone to North Korean leader Kim Jong-un, and hopes a positive development results from talks between North and South Korea
  • The week ahead: It’s a quiet start to the week in terms of data releases and events. The offshore highlights are concentrated on Friday with China’s trade data (Dec) along with US CPI and US retail sales all due for release on the last working day of the week. Locally the focus should be on the November retail sales which are out on Thursday. The US earnings season also kicks off this week and any comments from companies on the impact to earnings from US tax reform are likely to be of special interest.
  • Today’s calendar contains only second tier data releases and later tonight Fed Bostic (voter – neutral) speaks on the economic outlook in Atlanta.

For more information, please refer to the attached report:

  • Markets Today: not available until 15th January 2018