November 4, 2019

Markets Today: high on jobs growth

US equities hit new highs again on Friday.

Today’s podcast

Overview: Movin’ on up

  • Positive US-China smoke signals continue –  Phase 1 consensus in principle?
  • US non-farm payrolls stronger than expected – 128k vs 85 exp. Plus upward revisions
  • ISM Manufacturing recovers, but misses estimate – Not enough to derail the positive vibes
  • S&P 500 and NASDAQ close the week at new record highs
  • Global core yields higher across the board –  UST curve bear flattens
  • USD broadly weaker – NOK and SEK Friday’s outperformer. NZD and AUD also higher
  • Today’s highlights – AU retail sales and job ads, German and EU final October PMIs and US factory/goods orders
  • Rest of week highlights – AU RBA cash rate decision & revised forecasts, , NZ labour mkt; US non-manufacturing ISM; BoE meeting

Movin’ on up, nothin’ can stop me…Time to break free, nothin’ can stop me, yeah – M People

Positive smoke signals in the US-China trade front alongside a stronger than expected US labour market report boosted risk sentiment on Friday with a softer ISM manufacturing not enough to derail the positive vibes. US and European equity indices had a solid session with the S&P 500 and NASDAQ making new record highs, core global yields also moved higher with the 2y UST yield leading the move up in the US. The USD was broadly weaker with NOK and SEK outperforming on the day. The AUD and NZD also closed the week higher.

The October US labour market was the big data event on Friday and the report was a good one, allaying fears of potential weakness emanating from US-China trade tensions and its impact on the US manufacturing sector. Headline payroll growth rose in October by a stronger than expected 128K (consensus 85K) with revisions to the past two months adding a further 95K.  The BLS noted that carmakers’ jobs fell 41.6K as a result of the GM strike, while Federal government employment also was down, reflecting a drop in the number of temporary jobs for the 2020 Census, a headwind of another 20K workers. For October, the unemployment rate ticked up to 3.6%, but only due to an increase in participation (good news), while average hourly earnings were in-line with expectations at 3%.

The US ISM Manufacturing index for October was 48.3, up marginally from 47.8 in September, a little shy of the 48.9 consensus. Looking beyond the headline numbers, the really good news in the survey was the big rebound in the export orders index, to 50.4 from a tragically low 41.0 in September.The employment index was 47.7, up marginally from 46.3. New orders overall were 49.1, up from 47.3. Overall it is still a picture of a struggling US manufacturing sector, held back by global trade headwinds and soft domestic business investment, including from more subdued domestic oil and gas activity.

In addition to the data

We also had positive smoke signal on the US-China trade front. Early in the session, White House economic advisor Larry Kudlow said that the two sides were close to finalising the sections related to Chinese purchases of US agricultural goods, US foreign ownership in the Chinese financial services industry, and currency stability (including safeguards against manipulation).  He said that discussion of intellectual property theft had come a long way, but was not yet completed, while forced technology transfer progress was not quite as advanced and might spill over to Phase-Two. Later in the session adding to the positive sentiment, the Chinese Ministry of Commerce announced that a “consensus in principle” had been achieved on the Phase-One deal, but the US version of the events was a bit more cautious, just noting that progress had been made. Importantly, as much as the US-China trade updates continue to point to a Phase 1 deal looking like a certainty, the contentious issues on whether the US will cancel the planned December Tariffs and remove some of the current tariffs in line with China’s demands remains an unknown and if the issue is not resolved then a deal could easily collapse.

Equity markets benefited from the combination of better economic data (and less concern about US recession risk), encouraging comments on US-China Phase-One talks, and the relative stability in rates. The S&P 500 rose 1%, its third record close of the week, while the Nasdaq advanced 1.1%, its first record high since July. European equities also had a good session with the Stoxx Europe 600, up 0.7% on the day.

Core global bond yields also moved higher with US labour market and US-China news more than offsetting the softer ISM print. 10y Bunds closed 2.5bps higher at -0.382% while the rise in UST yields was led by the front end of the curve ( 2y +2.70bps to 1.554%). The 10yr UST yield closed 1.9bps higher at 1.71% after trading to an overnight high of 1.74%.  Looking at the week, however, US yields ended materially lower along the curve with 2y down 6.7bps while the 10y was down 8.5bps.

Fed officials were out in force on Friday, with influential Vice Chair Clarida saying that both the US economy and monetary policy were in a “good place”, reinforcing the message from the FOMC meeting that rates are likely on hold for some time.   However, he saw the risks as still “somewhat” tilted to the downside.  The Fed’s greater sensitivity to downside risks and the high hurdle for hikes is likely to restrain US rates from rising too far in the near-term.

The USD attempted to rally after the payrolls release

But the move was short-lived and it ended down for a fifth consecutive day, albeit only by 0.15% in the BBDXY index and 0.30 on DXY.  NOK and SEK were the outperformers on the day with the move up in oil prices (WTI +3.73 and Brent +2.42%) probably playing an influential role. Oil prices moved up on the US labour report but also on reports of further declines in US active drilling rigs ( -8 on the week to 822 and down 245 yoy).


The AUD closed just above the 69 cent mark on Friday ( +0.2%) and as we type it has edged a little bit higher to 0.6918. The good vibes in the trade front alongside solid performance in equity markets have been supportive factors for the risk sensitive aussie, a steady to lower CNY has also been good news. Against this backdrop the pairing of RBA rate cut expectations (the market now only prices around a 25% chance of an RBA cut by year end) has also played its part. The AUD gained 1.2% last week and from a technical perspective, the challenge for the currency now is whether or not it can break above the medium term downtrend at 0.6925/45, if so that could open the door for further gains over the coming weeks.

Writing the over the weekend

RBA watcher Terry McCrann suggested that RBA would pause until February and he also hinted at the possibility that Governor Lowe and Treasurer Frydenberg could announce an update to the Statement on conduct on Monetary Policy.


The NZD rose to its highest level since mid-August, at 0.6457, before closing the week around 0.6430.  The NZD was up 0.2% on Friday, bringing its weekly gain to 1.2%.  The broad-based weakness in the USD and the market’s paring back of OCR rate cut expectations combined to push the NZD to the top of its recent trading range last week.  CFTC data released over the weekend showed speculators remained heavily short the NZD as of last Tuesday (with a notional equivalent value of around US$2.6b), even as they cut their overall net long USD position.

In other news

House Speaker Nancy Pelosi said the US-Mexico- Canada trade agreement has sufficient support to pass the House, but that might not be enough to get a vote this year and President Trump suggested that next meeting with China’s leader Xi Jinping could be in Iowa. We are “Looking at a different couple of locations. It could even be in Iowa,” the president said.

Coming up

  • AU retail sales and job ads are the local highlights today, German and EU final October PMIs of are out this evening ahead US factory/goods orders tonight.
  • AU Retail sales should grow at a slightly faster rate of 0.5% in September, but retail trade volumes are forecast to rise by only 0.2% in Q3.  Weak volumes point to a limited boost from recent income tax cuts.

Market prices

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