Todays podcast

Overview Don’t be so hard on yourself girl

• Payrolls soft as the high frequency data had warned with only a mild market reaction overall
• Yields up (US 10yr year +3.9bps), USD down (BBXY -0.2%) and equities flat (S&P500 -0.0%)
• Fed taper now more likely in November or December, strong wages print keeps inflation alive
• AUD (+0.7%) and NZD (+0.6%) outperform and are both up around 2% on the week
• Coming up today: AU Job Ads, NZ Building Work, BoE’s Mann, US Public Holiday (Labor Day)

“Don’t be so hard on yourself, no; Learn to forgive, learn to let go; Everyone trips, everyone falls; So don’t be so hard on yourself, no”, Jess Glynne 2015

US payrolls came in softer than the consensus (235k vs. 733k expected), but a soft print was widely expected given the weakness seen in high frequency indicators such as HomeBase. The surprise for markets was more on Average Hourly Earnings which were stronger than expected (0.6% m/m vs. 0.3% expected). That probably explains the market reaction which was relatively mild for the size of the headline payrolls miss and for why yields rose (rather than fell in the wake of the report). The US 10-year yield ended up 3.9bps to 1.32% with the curve steepening, while the policy sensitive 5 year yields also rose by 1.8bps to 0.78%. Over the past week the 10yr yield is little changed along with the 5yr. There was little change in Fed rate hike expectations, with only a marginal downshift in pricing for 2022 and 2023, by around 1bp. The first Fed hike is still priced for March 2023. Steepening in the curve might also reflect prepositioning ahead of the $120b of bond supply this week given the Labor Day Public Holiday today in the US (and in Canada). Equity markets were little moved with the S&P500 ‑0.0% and hold onto its 0.6% rise over the week. Tech stocks outperformed (NASDAW +0.2) with cyclicals edging lower.

The USD (BBDXY -0.2%) in contrast continued its push lower (though did make up some ground later in the session as yields rose), ending the week down -0.7% which came in the wake of Powell’s Jackson Hole speech. The AUD and NZD were outperformers on Friday, both up around 0.6-0.7% to be around 2% higher on the week. Both appear to have firmly broken out of recent ranges and helping to lift NZD over the week has been hawkish RBNZ rhetoric, some signs of delta peaking, both seeing OCR rate expectations creep up with October now seeing a greater than 90% chance of a 25bp rate hike and 70bps of hikes are priced into the next three meetings. Kiwi rates are likely to be very sensitive to virus counts in the lead up to the October RBNZ meeting. As for other FX moves, it was mostly modest for EUR (+0.1%) which was little moved as was GBP (+0.2%), while USD/Yen eased -0.3% despite the rise in yields. For the week EUR and GBP are both up around 0.7%, while USD/Yen is down a marginal 0.1% and so far has shown little reaction to showing little reaction to PM Suga’s resignation – the ruling LDP will hold its leadership election on September 29.

First to Payrolls. Headline payrolls missed expectations at +235k against 233k expected. There were though favourable upward revisions to the prior two months of 134k, with July payrolls now at 1.053m compared to the initially reported 943k. While payrolls did miss the consensus, the whisper number was for a weak print given the weakness seen in the high frequency data such as HomeBase. Delving into the details reveals delta has halted labour gains in some industries with a flattening in hiring in ‘leisure and hospitality’ after the sector had averaged job gains of 350k a month for the past 6 months. Clearly the delta variant sweeping across the US has impacted and it is worth noting that employment in ‘leisure and hospitality’ is still down some 1.7m on pre-pandemic February 2020 levels. Overall payrolls are still down 5.3m on pre-pandemic levels while it would take around 7 months at the current trend pace of 750k to get back to pre-pandemic levels. Average Hourly Earnings within the report also continued to surprise, up 0.6% m/m against 0.3% expected and keeping alive fears of inflation being more than transitory for some, though inflation breakeven were little changed. The unemployment rate which is from a different survey fell to 5.2% as expected, from 5.4%.

The market reaction to the report suggests they are viewing the jobs slowdown as transitory for now, with the Fed still likely to taper, though more likely at November or December rather than as early as September. Dovish Fed Governor Brainard’s rule of wanting to make up 2/3rds of jobs lost as of December 2020 means there still needs to be another 2m worth of jobs to be made before tapering, and at the current trend pace of 750k it would take 2.7 months to get there, which puts the bias closer to December. Key to the ‘delta transitory’ narrative as far as the labour market is concerned is on expectations of further job gains as the enhanced $300 unemployment benefit payment end as of today and as in-person school resumes. The participation rate which was unchanged at 61.7% will be watched closely in this regard. Anecdotes amongst firms and strong job openings data continue to point to labour supply issues, rather than labour demand. Those notions were picked up in the ISM Services Index on Friday which was broadly in line with expectations at 61.7 vs. 61.6 expected. Symptomatic of a tight labour market, a widely run media story last week highlighted a McDonald’s restaurant in Oregon had called on 14 and 15 years olds to apply, having had limited success attracting staff even after it raised its minimum wage to $15/hour. Note Federal law allows 14-year-olds to work, with limits on hours.

Across the other side of the world, China’s Caixin PMI plunged to 46.7 in August, its lowest level since April last year, but the market looked through the data given the Delta outbreak in the country has since been brought under control. The report though did contain some interesting anecdotes on prices with output prices falling for the second time in three months and according to panel members, efforts to attract and secure new business had led firms to reduce their output prices over the month.

Coming up this week:

Central banks dominate with the RBA on Tuesday, and the ECB and BoC on Thursday. All three will be watched closely. The start of the week though will be quiet with Labor Day Public Holidays in the US and Canada.

• Australia: The RBA meets Tuesday and NAB expects the RBA to continue with the scheduled taper to the pace bond purchases to $4bn per week from the current $5bn per week. Expectations for a strong rebound in activity after the current lockdowns remain largely intact, though the optics of tapering amid protracted lockdowns means it is likely to be a close decision. As for when we can expect a rebound, NSW is seeking to substantially ease restrictions in mid-October when 70% adult vaccination is will likely be reached. As of Sunday, 40.8% of NSW adults were fully vaccinated and 73.5% had at least one dose (see Department  of Health’s vaccination update for details). Governor Lowe has an opportunity to expand on the RBA’s thinking the week after, speaking at the ANIKA foundation on 14 September.
• China: The trade balance for August kicks off the week datawise on Tuesday, with expectations for a small decline in the trade surplus from US$56.6bn to US$52.2bn. Inflation prints are on Thursday with the annual rate for CPI expected stable at 1.0% and for PPI at 8.9% from 9.0%. Money supply and aggregate financing numbers are due anytime in the week from Thursday.
• Europe: The ECB meets on Thursday and the focus at the ECB meeting will be on what the central bank signals for its pandemic bond buying programme.  The consensus is that it will slightly reduce its monthly QE purchase pace next quarter, from €80b per month to a still hefty €60-70b pace. The ECB will also present a new set of forecasts.  Klaas Knot and Robert Holzmann, two policy makers at the ECB, said Tuesday that the eurozone’s economy and inflation outlook have recovered sufficiently for the central bank to slow its pace of bond purchases.
• United States: A quiet week data wise with markets continuing to reflect on the weaker than expected payrolls report and what the high frequency data are saying about Septembers. Focus will also be on Fed speakers ahead of the FOMC decision on the 23rd with Williams and Kaplan scheduled on Thursday.

Coming up today:

A quiet day ahead with Labor Day Holidays in the US and Canada with markets closed in both countries. It is also very quiet in Australia with only ANZ Job Ads scheduled. Details below:

• AU: ANZ Job Ads – August. Job ads should fall in August given the lockdowns seen in Sydney and Melbourne.
• NZ: Volume of all Buildings – Q2. The consensus is at 2.9% q/q, up from last quarter’s 3.7%.
• EZ: Sentix Investor Confidence – September. The consensus sees a slight dip to 19.7 from 22.2. Also out is German Factor Orders which are expected to dip -0.7% m/m in July.
• UK: BoE’s Catherin Mann: Newly appointed external BOE MPC member Mann is speaking online at the ANU Crawford School Leadership Forum. She is on a panel speaking on “After the recession: how should we renew our economies?”.

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