A further slowing in growth
If it wasn’t for Friday’s US labour market data, Lionel Richie’s “All night long” would have been a great option for a title today, highlighting PM May’s sleepless effort to strike a deal about a deal with the EU.
The November US jobs report was good for risk assets depicting a strong labour market, but with no signs of an acceleration in wage growth, so as Sonny and Cher would sing, the beat goes on (and Eminem da da dum da dum da da). This goldilocks scenario helped US equities close the week in a positive note, the UST curve ended marginally steeper and after initially falling on the earnings headlines, the big dollar closed the week stronger while GBP gave back much of its previous day’s gains. Oil prices led the move higher in commodities with gold the notable loser.
The US wage conundrum remains alive and kicking with the November labour market data dump revealing a record 86th consecutive month of job gains. Non-farm payrolls beat expectations (228k vs. 195k exp.), the job gains kept the unemployment rate at a 17 year low (4.1%), but average hourly earnings disappointed at 0.2% mom vs. expectations for 0.3% rise. So despite all the job creation, the year on year wage growth declined to 2.5%yoy from 2.7% in the previous month. The data suggests there is still slack in the US labour market, but expectations of more job creation over the coming year also point to further declines in the unemployment rate and eventual acceleration in wage pressures. The debate within the Fed remains unresolved, does the FOMC waits for evidence of higher wage growth or does the outlook warrant a slow reactive approach to further hikes next year? The latter remains our Fed bias for 2018.
So after an initial wobble on the headlines, the USD managed to end Friday stronger with both DXY and BBDXY recording a fifth consecutive day of gains. A closer look at G10 performance however shows that much of the USD strength on Friday emanated from JPY and GBP weakness. The latter reflecting a classic case of buy the rumour sell the fact while the former declined amid an improvement in risk appetite and a small rise in 10y UST yields.
The pound enjoyed a steady rise during our APAC session amid speculation followed by a formal announcement that a “deal to make a deal” had been agreed between the UK and the EU (the most contentious issue – how to avoid a hard border between EU member Ireland and Northern Ireland – was left largely unresolved). Subject to EU leaders approval this week, negotiations can now move to phase two– a transition deal and then a future trade agreement. On the positive side, the news removes some uncertainty and likely means PM May’s position is shored up for some months. Nevertheless there is still a fair bit of uncertainty and the conditionality to the Irish agreement serves as a reminder that the pillars of negotiations remain precarious.
AUD ended Friday almost unchanged, but looking at the chart the currency remains vulnerable to the downside. In our session on Friday, the pair initially traded to a low of 0.7502, but then China’s better than expected trade figures provided a small uplift. US labour data headlines briefly took the currency to an overnight high of 0.7534, but then a resurge in the USD dragged the AUD back down to 0.7502, before closing the week at 0.7509. NZD experienced a similar trading pattern, opening soft on Friday, jumping to an overnight high of 0.6870 post payrolls and ending the week at 0.6837, comfortably inside its well-trodden approximate range of 0.68-0.70 held since late October.
As for US Treasuries, the aftermaths of the US labour data deluge saw the 2y rate end the day 0.7bps lower at 1.794% while 10y UST yields ended the day 0.7bps higher at 2.376%.So a mild steepening of the curve, partly reversing the flattening trend over the week.
Oil prices led the gains in commodities supported by china’s trade data revealing a decent rise in oil imports during November. The risk on theme for the day was also helped commodities perform, after a volatile couple of days, copper was up 0.5% and iron ore gained 1.6%. Meanwhile, amid its safe haven attributes, gold struggled and closed Friday down 0.4%.
On Saturday China’s November CPI rose to 1.7% (1.8% exp.) and PPI came in line with expectations at 5.8% yoy, but down from the 6.9% printed in October.
We have a quiet start to a busy week which includes the NAB Business Survey, AU employment, FOMC, ECB, BoE, down-under fiscal updates, EU summit and a new Star Wars movie.
The soft weekly (-1.4%) close has left the AUD vulnerable to the downside with key support level at 0.7490 now well within sight (uptrend line from the Jan-16 low). Tuesday’s NAB survey and Thursday’s Labour force report are the key domestic data releases. We think the latter is likely to show jobs growth at +15k with the unemployment rate unchanged at 5.4%, however the sample rotation lottery points to the risk of a somewhat higher 5.5% print.
A Fed hike this week is essentially priced, but the dot plot is the big uncertainty. We think the rude health of the US economy and buoyant prospects for its labour market will result in a Fed leaving its median dot plot unchanged in 2018. If so the USD has the potential to make further inroads. US tax reform negotiations are a potential source of volatility and although the ECB is expected to stand pat this week, its growth and inflation forecast could have an impact on longer dated core global yields and the euro.
See our What to Watch publication for more details.
On global stock markets, the S&P 500 was +0.55%. Bond markets saw US 10-years +1.26bp to 2.38%. In commodities, Brent crude oil +1.93% to $63.4, gold-0.4% to $1,245, iron ore +1.6% to $68.47, steam coal +0.3% to $97.55, met. coal +1.1% to $228.50. AUD is at 0.7509 and the range since Friday 5pm Sydney time is 0.7502 to 0.7534.
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