September 5, 2016

Markets Today: None the wiser

The August US employment report turned out to be something of a Goldilocks affair.

So sang Irish pop rock band The Script in 2008 and which adequately sums up the state of play regarding 2016 Fed intentions. The August US employment report turned out to be something of a Goldilocks affair – not hot enough to further elevate the risk of a September Fed move but not cold enough to instil serious doubts that  the economy might be a slowing more broadly after the jolt from last Thursday’s weak manufacturing ISM survey.

Payrolls rose by 151k against a consensus of 180k, with largely offsetting revisions to July and June. Unemployment stayed at 4.9% rather than fall to 4.8% as had been expected with participation unchanged at 62.8%. Average hourly earnings rose by just 0.1% but the 0.2% expected to pull annual growth down to 2.4% from 2.6%, though statistical quirks probably depressed the August outcome.

Stocks liked the inference from the report – that the economy is still travelling okay but the Fed probably won’t move at least before December – with all three major US stocks indices gaining 0.4% and the VIX dropping back below 12.0 (-1.5pt to 11.98). The dollar ended little changed after a bungee jump (down then back up) after the figures.

Bill Gross was out again ascribing a near 100% probability to a September Fed move, but the US money market voted otherwise, knocking down September Fed tightening odds to 29% from 33% while keeping December about where it was on Thursday (69% vs. 68%).  Bond yields rose a bit over the 24 hours through Friday’s New York close (e.g. 2s +0.4bp to 0.788) though were unchanged relative to pre-NFP levels having initially fallen by some 5bps.  100s ended the day +3.4bps to 1.603%.

In FX, the narrow DXY dollar index finished 0.2% higher while the broader BBDXY index finished virtually unchanged. This disguises a fair amount of post-payrolls volatility, with the dollar initially dropping sharply as the algorithmic trading outfits dutifully responded to weaker than expected headlines for payrolls, unemployment and earnings. Losses were subsequent fully retraced and in the case of USD/JPY, extended to a high of Y104.32 before finishing at Y103.92.

The AUD initially rose to 0.7616 from 0.7560 pre-payrolls before finishing at 75.73, a gain of 0.3%.  GBP/USD made a new one month high of $1.3352 before easing back to 1.3294 at the NY close. CAD was the outperformer Friday, USD/CAD -0.85% to 1.2993 and aided by a smaller than expected July Canadian trade deficit and firmer oil prices.

Commodities were stronger for the most part, gold +$11 to 41,325 and oil +$1.28 to $44.44 (WTI) The LMEX index of traded industrial metals finished flat while iron ore added $0.53 to $59.39 for the 62% fines China import benchmark.

The only Fed official to speak after the payrolls numbers was Richmond Fed President Lacker (a noted hawk but not a current FOMC voter). He said the weaker pace of hiring in August still left the job market on a strengthening path and the case for higher rates would only grow stronger unless job growth slowed “significantly in the months ahead.”

At the weekend, latest Australian auctions produced the new year-to-date high clearance rates in both Sydney and Melbourne (Sydney 83.9% up from 78.5% the prior week and Melbourne clearing 79.3% up from 77.4%.

Coming Up

The G20 are still meeting in Hangzhou with an official communique still due but most unlikely to be market moving. On the sidelines we have already had Barack Obama warning the UK that a separate trade deal between the U.S. and UK would not be a priority and the Japanese ministry of foreign affairs issuing what the FT describes as a ‘daunting challenge’ to UK PM Theresa May, to negotiate a very ‘soft’ British exit from the UK or risk seeing Japanese banks and other companies leave for the continent.

Also to note on the geopolitical front this morning is news that the right wing populist, anti-immigrant Alternative for Germany (AfD) party took 21 per cent of the vote in weekend elections in the north-eastern state of Mecklenburg-Vorpommern, against 19 per cent for the CDU, according to an Ard exit poll. The result means AfD will now have seats in nine of Germany’s 16 state legislatures.

US is out today for Labor Day. Tomorrow sees the last RBA meeting under the Governorship of Glenn Stevens (no change highly probable) and then tomorrow night US non-manufacturing ISM and the Fed’s Labour Cost index are the calendar highlights for the week. Locally, GDP is due Wednesday with inventory and net export ‘partials’ today and tomorrow.

In Europe the UK services PMI is this evening while the ECB meets Thursday amid speculation they may announce an extension of the QE bond buying programme beyond the currently scheduled March 2017 end date.


On global stock markets, the S&P 500 was +0.42%. Bond markets saw US 10-years +3.43bp to 1.60%. In commodities, Brent crude oil -0.13% to $46.83, gold+1.2% to $1,323, iron ore +0.7% to $59.39. AUD is at 0.7575 and the range since Friday 5pm Sydney time is 0.7539 to 0.7607.

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