A further slowing in growth
Friday was all about US payrolls and the report did not disappoint. Along with solid employment gains, there were improvements in the other metrics of the US labour market edging us one step closer to a Fed tapering announcement. Market reaction to the data saw the UST curve bear steepened with the 10y UST Note testing 1.30% while the USD ended the day broadly stronger.
GE: Industrial production (m/m%), Jun: -1.3 vs. 0.5 exp.
US: Change in nonfarm payrolls (k), Jul: 943 vs. 870 exp.
US: Unemployment rate (%), Jul: 5.4 vs. 5.7 exp.
US: Average hourly earnings (y/y%), Jul: 4 vs. 3.9 exp.
CA: Employment change (k), Jul: 94 vs. 150 exp.
CA: Unemployment rate (%), Jul: 7.5 vs. 7.4 exp.
CH: Exports (US$, y/y%), Jul: 19.3 vs. 20 exp.
CH: Imports (US$, y/y%), Jul: 28.1 vs. 33.3 exp
Friday was all about US payrolls and the report did not disappoint. Along with solid employment gains, there were improvements in the other metrics of the US labour market edging us one step closer to a Fed tapering announcement. Market reaction to the data saw the UST curve bear steepened with the 10y UST Note testing 1.30% while the USD ended the day broadly stronger. Equities liked the report with pro cyclical sectors outperforming while the tech heavy NASDAQ struggled amid the lift in longer dated UST yields. Also, a step closer, the US Senate advances $1tn infrastructure package in key vote while China July trade data misses both Export and Import expectations. The AUD opens the new week at 0.7362 and NZD is at 0.7015.
Non-farm payrolls for July rose a stronger than expected 943K after an upwardly revised 938K in June, the strongest two-month sequence of payrolls growth since the initial partial bounce-back through the middle part of last year. The formal market consensus was 858K (within a range of 350k-1.2m and a Bloomberg Whisper number of 880K).
Along with the solid employment gain, there were improvements in the other main metrics of the labour market . These included a fall in the unemployment and underemployment rates, a rise the participation rate, and in the employment-to-population ratio. While not wholly universal, further delving reveals improvement across various age, ethnicity, and education standards, improvement the Fed is looking for to assess the net overall improvement in the labour market relative to its maximum employment mandate.
A broadly stronger US labour market report means the Fed tapering decision is now a little bit closer. But how close? Well it depends on what barometer one uses.
Fed Bullard amongst a few FOMC members thinks an announcement should be made as soon as possible. Earlier last week, Fed Governor Waller’ said he felt the Fed could start tapering by October if 800k to 1m jobs were added in both July and August. Meanwhile Governor Brainard definition of “substantial further progress” is seemingly stricter. Last week she hinted at the need to make up two thirds of the 10m shortfall evident last December for her to sanction a tapering announcement. That would be around 6½-7m of job creation and after Friday, the cumulative the number of net job created since December is 4.3m. So, on Brainard’s measure we need at least another two solid non-farm payrolls prints. The next non- farm payrolls reports are September 3, October 9 and November 5.
Overall, there is not a lot of disagreement on a taper announcement coming sometime between September-December followed by actual tapering sometime between November and January. Fed Chair Powell’s keynote address at the Jackson Hole symposium later this month now has an added level of importance. That said, the most important issues it’s the linkage between QE tapering and the timing of the next rate lift-off, given an end to tapering is needed before a Fed funds rate hikes becomes a consideration. The Fed asset purchase programme consist of $120bn purchases per month, a $20bn tapering would end the programme in six months whilst a $10bn tapering approach would take a year.
Delta dynamics is a risk to the tapering timeline, new Covid-19 cases in the US are back to levels seen in last winter’s surge with cases now above 100k a day on average . According to data from the US Department of Health and Human Services, more than 66k Americans were hospitalized with Covid-19 across the country as of late Saturday, the highest since February. The US current covid wave of infection has not yet peaked, and it remains to be seen if the US can sustain its current pace of economic recovery while Delta keeps running loose.
Moving onto markets reaction to the solid US labour market data triggered a decent move in UST yields and the USD . The US Treasury curve bear steepened with the 10y Note climbing 7.5bps relative to Thursday’s levels, closing the week at 1.2969%, after trading to a low of 1.12% earlier in the week following the softer than expected ADP report. 10-year rates were 4bps higher in Germany, to -0.22%, and 8bps higher in the UK, to 0.61%, a day after the Bank of England said “some modest tightening” might be appropriate over the next few years. AU bond futures yield climbed 3.5 bps on Friday ending the week at 1.185%
The lift in UST yields provided a boost to the USD with the greenback up ~0.5/0.6% in index terms (BBDXY and DXY). Looking at G10 pairs, the EUR fell back to near its recent lows (-0.6% at around 1.1760) while USD/JPY pushed up 0.4% to above Y110. Both the AUD and NZD were down 0.7% on Friday, with the NZD finishing the week just above the 70c mark. For now, 71c remains a key resistance for the kiwi.
Meanwhile after attempting a break above key resistance around the 0.7415/20 area midway through last week, the AUD starts the new week at 0.7360, still technically vulnerable to the downside. That said, both the AUD and NZD were the notable USD outperformers on the week, up 0.16% and 0.52% respectively.
Equity markets saw rotation back to previous reflation trade winners and away from big tech stocks, a reversal of recent trends. The Financials sector of the S&P500 was up 2% on Friday, with bank stocks benefiting from the steeper yield curve which is perceived as supportive of net interest margins, while the Materials, Energy and Industrials sectors also posted gains. Tech stocks, which are typically more sensitive to higher long-term rates, were generally weaker alongside ‘bond proxies’ such as utilities stocks. The NASDAQ was down 0.4% on Friday, paring its weekly gain to 1.1%. The S&P500 in contrast finished 0.2% higher, at a fresh record high.
The Shanghai Composite index was the other notable underperformer on Friday amid lingering regulatory concerns, that said looking at the week, it was a solid performance with all major indices adding gains over the past five trading days.
Moving onto other news, China’s July trade data released on Saturday was softer on both export and import measures . Exports grew 19.3% in USD terms in July from a year earlier, while imports rose 28.1%, against consensus forecast that exports would increase by 20% while imports would climb 33.3%. That left a trade surplus of $56.58 bn for the month. Extreme weather conditions and local Covid outbreaks have not helped while supply disruption have also hampered export activity.
Finally, the US Senate voted on Saturday to advance to the next step of a $1tn infrastructure package. This was seen as an important step towards securing the passing of the bill. The US Senate will try to move toward passage of a $1 trillion infrastructure bill on Sunday although there are still some differences of opinion between Republican which may prove yet another hurdle/delay.
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