July 3, 2015

Markets Today: Circling the wagons

An overall disappointing US payrolls report, the ‘lowlight’ of which was an unexpectedly flat monthly read on average hourly earnings and which, together with a 0.1% downward revision to May, served to pull annual earnings growth down to 2.0% from 2.3%.

An overall disappointing US payrolls report, the ‘lowlight’ of which was an unexpectedly flat monthly read on average hourly earnings and which, together with a 0.1% downward revision to May, served to pull annual earnings growth down to 2.0% from 2.3%. This is not a number to inspire confidence in Janet Yellen that inflation will be heading back close to the Fed’s 2% objective anytime soon.

Alongside, the further fall in the unemployment rate, to 5.3% from 5.5%, was clearly flattered by a 3/10% fall in the labour participation rate, to its lowest since 1977.  According to one report (Market News) citing BLS officials, the unemployment rate drop may have been exaggerated by seasonal factors that reflected all the school makeup days for the severe winter’s snow. Presumably this meant more people than usual temporarily dropping out of the labour force to ferry their kids to and from school on the extra school days. As for non-farm payrolls, the headline 223k rise was close to the 233k median forecast, but not when 60k worth of downward revisions to April and May was added in.

The net market results of the payrolls report was to see US Treasury yields lower (By 6bps at 2 year and 4bps at 10 years) and the US dollar softer but not by much (the narrow DXY dollar index fell by just 0.2%). Equities markets didn’t really know what to make of the numbers, probably with even bigger things on their mind in the coming 72 hours and given the early pre-Independence Day market close, ending very slightly lower. This follows another bad day for China stocks, where the news of a relaxation of margin trading rules failed to prevent a 3.5% loss for the Shanghai Composite Index. This has reduced the year-to-date gain to just 20% from 60% three weeks ago.

A couple of notable developments in Europe ahead of Sunday’s Referendum. The IMF is out re-iterating that Greece’s debt burden is unstainable without debt relief and suggesting that EU creditors should extend the maturity of Greece’s debt from 20 to 40 years. This sounds like a woman (Madame Lagarde) after Alex Tsipras’ heart (we somehow doubt that). It potentially plays into the hands of the ‘No’ camp in Sunday’s referendum.

We’ve also had the ECB announcing the inclusion of €90bn worth of state-backed corporate bonds into its ‘QE-eligible’ armoury. This reads like a further circling of the wagons by the ECB, in the spirit of doing ‘whatever it takes’ to protect the euro-area in the wake of the referendum.  Despite this news, Euro-peripheral bond spreads were mostly wider.

Overall in currencies, Sweden’s decision to cut its already negative policy rate to -0.35% from -0.25% (unexpected) sees the SEK firmly at the bottom of the G10 league table.  AUD was slightly firmer post payrolls and is weaker versus the NZD. Iron ore crunched $3.6 lower and this may resonate this today.

Coming Up

Post payrolls and pre Greek referendum, we could be in for a long (but hopefully good) Friday. According to one our Greece-based consultancy friends, first exit polls will be published as early at 18:00 CET (2am Monday morning AEDT) and with the final result probably known within few hours of that. So probably by the time the Wellington/Sydney market opens. A Monday morning to be spent more enjoyably as an analyst than a market-maker, we feel sure.

Latest publicly available polls suggest that a ‘yes’ vote will get up on Sunday, which market will interpret as greatly increasing  the chances of a an early new agreement between Greece and her creditors that keeps Greece from defaulting and inside the euro area. The worry for market will be if Alex Tsipras then refuses to relinquish the Prime Ministership having campaigned so vociferously for a ‘no’ vote. It is hard to escape the view that Mrs Merkel, Mr Schaeuble and Madame Lagarde, to name but three, can’t wait to see the back of him.  Greek Finance Minister Varoufakis, at least, has gone public saying he will resign in the event of a ‘yes’ vote.

Knee-jerk market reaction to a ‘yes’ should be both risk and Euro positive. In the event of a ‘no’ markets will – rightly in our view – jump to the conclusion that a Greek exit from the Eurozone shifts from possible to probable, and that a severing of the lifeline from the ECB to the Greek banking system will be the mechanism that sets this process off.  Despite the restrained market reaction to date on news of the referendum and Greece’s failure to pay the IMF on time, we would still expect a knee jerk ‘risk-off’ and euro-negative market reaction.  We suspect AUD and NZD go down, not up, under this scenario.

The domestic highlight today will be the May ABS Retail trade report. Top down factors point to a good result. There was a generally positive reaction to the Federal Budget and there’s been further improvement in the labour market, factors underpinning spending propensity and household income growth.  We look for faster than expected growth of 0.6% in May, also benefiting from some payback after the flat result for April, and ahead of the market consensus’ 0.5% pick.


On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years -3.78bp to 2.38%. On commodity markets, Brent crude oil -0.32% to $61.81, gold-0.3% to $1,166, iron ore -6.0% to $55.63. AUD is at 0.7634 and the range was 0.759 to 0.7658. (For more market prices, please see p.2 of the pdf).

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