August 14, 2020

Markets Today: Jobs, stimulus and bond yields

Jobs data is confusing right now. How much is it influenced by government stimulus activity?

Today’s podcast

Overview: Afraid of heights

  • Altitude sickness sees the S&P 500 retreat after making an all-time high
  • Soft 30y UST Bond auction adds more fuel to the UST bear steeping curve theme
  • US Jobless claims regain their mojo, good news, but bad news for stimulus?
  • US political debate is like throwing Spaghetti. US Senate to resume September 8
  • Dollar loses ground against EU currencies, but AUD and NZD are a bit softer
  • NZ Manufacturing PMI, RBA Lowe, China’s July activity readings today’s highlights. EU Q2 GDP followed by US retail sales and Consumer survey out later today


Do you wanna see the view from the top of the Empire State Building?

Definitely not, I’m afraid of heights – Wavves


Well many say that the best treatment for altitude sickness is to stop and rest where you are. After making a new all-time high the S&P 500 was unable to sustained the move, ending the day marginally in negative territory. US political stalemate a likely drag as the US Senate next legislative session is set for September 8. A soft 30y UST bond auction has added further fuel the bear steeping theme in the UST curve and the USD has had a mixed night, losing ground against EU currencies, but a tad stronger against both the AUD and NZD. AUD now trades at 0.7149 and NZD at 0.6547.

The S&P 500 has ended the day down 0.2% while the NASDAQ closed 0.27% higher, with Apple share (1.77%) helping the tech heavy index stay above positive territory. European equities broke a four day winning streak with the Eurostoxx 50 index -0.60% while all major regional indices were down between 0.6% and 0.8%. The UK FTSE 100 was the worst performer down 1.50%.

The softness in Europe equities has been partly attributed to a series of disappointing earnings reports. Deutsche Bank fell on plans to accelerate job cuts while Aegon’s dived after results missed estimates. US-EU trade relationship has also been a concern following news that 24 European countries lodged a complaint with the US State Department this week over President Donald Trump’s expansive use of sanctions to help influence American foreign policy goals.

Before the US senate news (more on that below), the US equity market was boosted by positive US jobs data and still improving virus news. The rate of new COVID-19 cases continues to trend lower in the US, albeit from very high levels.

US jobless claims fell below 1 million for the first time since mid-March, pointing to a continued recovery in the US labour market (although the level of jobless claims remains very high, above that seen after the GFC).  After stalling over several weeks, US jobless have began to decline again ( see chart of the day below), suggesting the US labour market is starting to improve, notwithstanding the economic impact from the containment measures introduced to combat the COVID-19 outbreak. Ironically, an improving labour market may ease the pressure on US politician to come up with a new stimulus plan.

While these positive news contributed to the S&P 500 record high move ( 3387.89), political news likely played into the dampening vibes late in the session. During the NY afternoon, Senate Majority Leader McConnell announced the Senate’s next legislative session will begin September 8, effectively killing any hopes for a stimulus agreement over the coming weeks. Highlighting the disparity in views, House Speaker Nancy Pelosi said she would be willing to meet with the Trump administration again “when they come in with $2 trillion,” plan and in response Senator McConnell described the Democrats view as  “throwing spaghetti at the wall to see what sticks.”

Global rates have continued to track higher, with the US 10-year Treasury yield hitting its highest level in almost 8 weeks, at 0.72%.  This morning’s record $26b auction of 30-year bonds came 2.4bps above pre-auction secondary market levels, helping to drive a steepening in the yield curve (5y +1bps, 10y +3bps, 30y +6bps).  Market-implied inflation expectations also continue to push higher, with the 10-year ‘breakeven inflation’ rate reaching its highest level since January, at almost 1.7%.  Market-based inflation expectations remain low in absolute terms but the trend higher is one to watch. Curve steepening is the other implicit theme, as front end yield remain anchored by central bank policy, the market will soon begin to wonder how much tolerance central bank’s have for the issuance driven rise in longer dated yields. On the week 10y UST yields are up 12bps while the 30bond is up 23bps to 1.4277%.

Moving onto currencies

The USD is a tad softer in index terms (DXY -0.19% to 93.243, BBDXY -0.16% to 1177.21) with its weakness largely due to the strength in EU currencies. NOK is up 0.71% and the euro is up 0.26% to 1.1814.

NZD ( @0.6547) and AUD (@0.7149) are the two notable underperformers, down 0.44% and 0.17% respectively. RBNZ rhetoric a likely contributor to the Kiwi’s underperformance amid the usual flurry of media interviews from senior RBNZ officials post-MPS.  RBNZ Chief Economist Yuong Ha reiterated that the Bank was actively seeking to drive bond yields lower with its frontloaded purchases.  On the possibility of negative rates, which the MPS set out as the likely next policy step if required, Ha said it was dependent on the economic outlook, adding “it’s conditional.  It’s not inevitable.”  Ha said the Bank would prefer a lower exchange rate but acknowledged that they were limited in how much they could influence it.

In addition to the softness in US equity markets

AUD underperformance may have also been influence by the weakness in metal prices overnight. Copper has been a big underperformer, down 3.16%, its biggest decline since April, following new of an increase in output by Codelco, the Chilean state-owned mining company, noted a “quick” ramp-up at its Chuquicamata underground operation. The LMEX index closed 1.82% lower, iron ore lost .3% and gold gained .098%.

Chart of the day – US Jobless claims regaining their mojo?

Coming up

  • This morning New Zealand gets its Manufacturing PMI for July ahead RBA Governor Lowe testimony before parliament at 9:30 am (AEST). China’s activity readings for July are out midday Sydney time.
  • Later today the Euro Area releases June trade balance figures along with preliminary 2Q employment and GDP data. Tonight, the US publishes retail sales, industrial production (July) and the preliminary August U. of Michigan Consumer sentiment survey.
  • Speaking before Parliament, Governor Lowe is expected to provide further details on the RBA’s assessment of the economic outlook and the risks to the recovery. The Reserve Bank’s latest forecasts in its statement on monetary policy showed the BAnk expects a more prolonged recovery than before, despite better near-term data. In contrast to the dovish RBNZ outcomes on Thursday, we expect the Governor to push back, again, on negative rates and FX intervention. The RBA has noted any changes to its stimulatory policy settings would be focused on its current package of measures: the cash rate, yield curve control and the term funding facility.
  • After Wednesday’s Aggregate Social Financing disappointment ( July ¥1.69tn down sharply from 3.43tn in June), no doubt many will be wondering if China’s activity reading for July ( see details below) have a bit of downside risk. A cautious consumer has been one China’s COVID-19 recovery themes, the market is looking for an improvement on the yoy figure from -1.8% to 0.1%, so a move back to positive territory could steal the headlines today. Early readings from auto sales and general goods sales suggest this looks like a good bet.
  • US retail sales are also expected to print positive figures, but not as strong as the ones we got in June. Auto sales and gasoline sales are expected to be major positive contributors. The preliminary August U. of Michigan Consumer sentiment survey is expected to remain close to suppressed levels at 71.9.

Market prices


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