Below trend growth to continue
Modest dollar strength and higher Treasury yields was the initial response to the US payrolls data but proved fleeting.
Modest dollar strength and higher Treasury yields was the initial response to the US payrolls data but proved fleeting. After 44k of upwards revision to September and August the 161k October NFP headline was a bit better than the 173k consensus. Unemployment fell to 4.9% from 5.0% as expected. The standout feature of the report was the rise in annual average earnings to 2.8% – a new cycle high.
Pre-election ‘risk-off’ sentiment and flows dominated the remainder of Friday’s US session, albeit there was no specific election related headlines to steer markets. RealClear Politics’ poll-of-polls as of Friday night had Clinton 46.6/Trump 44.9 (meaning too close to call) and as of now, its 46.6/44.8 after three weekend polls, one of which (LA Times) has Trump 5 point ahead and one (NBC/WSJ) Clinton ahead by the same margin. Hillary was last seen heading to Michigan for an impromptu stop-over in an effort to shore up her poll standing (she leads there by 4-5 points in latest state polling)
Friday’s markets encompassed a 9th successive down day for the S&P – for the first time since 1980. After grinding out a 12 point gain in the post-payrolls morning session, the S&P gave it all back in the afternoon to finish 0.17% lower at 2085.18. The VIX added another 0.43 to 22.51, also its ninth successive rise and to the highest since the day of the ‘Brexit’ vote.
In US rates, mild bull flattening proved to be the order of the day after an initial +/-2bps jump in yields on the payrolls headlines. 2yr Treasuries ended 2.3bps lower at 0.785% and the 10-year -3.5bps at 1.777%
In FX, most pairs moved in accordance with the US political risk playbook, the US dollar softer overall with the DXY -0.27% and the broader BBDXY -0.21%. USD/JPY was – a little surprisingly – also up (Y103.12, +0.14%). EUR/USD was +0.32% to 1.1141 and USD/CHF -0.56% to 0.9684, confirming themselves as likely beneficiaries in the event of a Trump victory, though USD/JPY will doubtless would be a big part of the reaction as well. Sterling continued to benefit from short covering in the wake of Thursday’s judicial ruling re triggering Article 50, GBP/USD +0.45% to 1.2517.
AUD/USD was largely sidelined Friday, -0.12% to 0.7673, as too NZD (-0.15% to 0.7326).
In commodities, oil was lower with WTI down another 60 cents to $44.07 and Brent -80 cents to $45.60. Gold gained another 41.20 to 1304.50 while iron ore was down 50 cents to $65.00. Coal continues to do no wrong, steaming coal +$2.15 to $108.65 and coking coal up another $3.50 to a new cycle high of $257.00.
Commenting after the US data, Fed vice chair Stanley Fischer said the economy could “to some extent exceed our employment and inflation targets,” in remarks that could be viewed as implying some tolerance for overshooting its goals to coax out more investment and hiring (and in keeping with Fed chair Yellen’s ‘high pressure economy’ remarks of a few weeks ago). At the same time he noted – seemingly with approval – that markets put the probability of a December hike at above 70%.
Dallas Fed President Robert Kaplan re-iterated a view that the Fed can afford to be patient in removing accommodation but that the Fed is making good progress towards its dual mandate, that the case for removing accommodation is strengthening and that some removal of accommodation would be appropriate.
Atlanta Fed President Dennis Lockhart told reporters on Friday that ‘There’s a relatively high bar, at least in pure economic terms, a relatively high bar to not moving in December,” but added that “There are other things that go on in the world that could give pause and I don’t completely rule them out,” he said, without providing specifics. We can all think of at least one thing he has in mind.
Locally, CoreLogic’s weekend market summary shows the capital city weighted average clearance rate at 77.5% up from last week’s final 74.4%, on auction volume of 2,490 up from 2,253. Sydney cleared a preliminary 82.1% versus last weekend’s final 80.5% on volumes of 1,063 down from 1,100 and Melbourne 80.5%.
The election is Tuesday, with polls on the east coast closing at 6:00pm. If the 2008 and 2012 elections re any guide the result could be called as early as 3pm AEDST.
This really is the only game in town this week, though locally the spotlight will be the RBNZ rate announcement on Thursday, where a cut is still expected despite a spate of strong economic reports. Australia has a quiet week with the major data points being the NAB Business Survey on Tuesday and Consumer Sentiment Wednesday.
On global stock markets, the S&P 500 was -0.17%. Bond markets saw US 10-years -3.53bp to 1.78%. In commodities, Brent crude oil -2.73% to $45.58, gold-0.3% to $1,305, iron ore -0.5% to $65.00. AUD is at 0.7675 and the range since Friday 5pm Sydney time is 0.7656 to 0.7689.
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