Markets Today: Strong enough

Sheryl Crow’s hit ”strong enough” finds Crow frustrated in a relationship and asking the question, “Are you strong enough to be my man?”. ell Friday night was all about the US jobs report and no doubt a similar question (without the man bit of course) crossed investors’ mind.


In the end the numbers were solid enough to keep the Fed on track for a June hike, but not strong enough to erase uncertainties over the future Fed funds rate’s path beyond June. US equities indices made new fresh highs, but the lack of wage inflation in the report triggered a rally in US Treasury yields and saw the USD fall across the board. NZD and AUD were the top performers on Friday, but terrible news of another terrorist attack in the UK has seen both currencies open a little bit softer this morning.

US non-farm payrolls rose to 138k in May against expectations for a 182k rise, net revision also disappointed shaving 66k jobs from previous readings. The unemployment rate fell to 4.3% from 4.4%, largely driven by a decline in the participation rate by 2 tenths to 62.7%. Hourly earnings rose 0.2%mom, in line with consensus, but the yoy reading stayed at 2.5% against expectations of 2.6%. The lack of wage growth was seen as the major driver for the rally in UST yields and broad USD sell off.

Reading through commentaries on the report, seasonal factors were raised by many as one major reason for the softness in the numbers. Jim O’sullivan from HFE noted last year payrolls rose just 38K in May, but the weak reading was followed by a surge over the following months. Three more job reports will be released before the September FOMC meeting, so probably enough data points to prove if the recent slowdown in wage growth was just a blip or the start of a new trend.

On Friday all three major US equity indices made fresh new highs with the jobs report leaving equity investors with the impression that future Fed hikes are unlikely to be anything but gradual.  The Dow rose 62.11 pts (0.3%) to 21206.29, the S&P 500 climbed 9.01 pts (0.4%) to 2439.07 and the Nasdaq added 58.97 (0.9%) to 6305.80. Early in the session European equity indices also closed higher with the Stoxx Euro 600 index  +0.23%, CAC 40 +0.47%, DAX 1.25% and FTSE100 0.005%.

Meanwhile the jobs report triggered a selloff in the US dollar across the board with DXY dropping 0.5% to 96.715 and BBDX shaving 0.41% to 1196.41. Both indices are now well through levels seen when President Trump won the election on November 8 last year.

The NZD and AUD closed Friday at the top of the G10 leader board, up 1.16% and 0.94% respectively. NZD closed the week at 0.7142, its highest level since March 2 and looks to have a fair bit of room to trade above 0.72. Meanwhile the AUD regained all the lost ground post last’s week China’s PMI induced sell off and closed the week at 0.7443. After the terrible news from London over the weekend both currencies have opened the week a little bit lower. The AUD is at 0.7425 and NZD is at 0.7132.

USD/JPY is back below the ¥111 mark, but at ¥ 110.37 it remains contained within its recent ¥110.24 to ¥112.13 range held since mid-May. The euro has retained its upward trend, against the USD, climbing 70pips on Friday and closing the week at 1.1274. The ECB meeting next week will be crucial for the prospect of further near term EUR appreciation. We expect the central bank to remove its commitment to the possibility of lower rates in the future as it gradually prepares the market to the notion of QE tapering later in the year.

The US jobs report triggered a rally in US Treasury yields with the move led by the back end of the curve.  10y and 30y yields fell 5.2 and 5.3bps to 2.16% and 2.81% respectively. Pricing expectations for a Fed hike in June were little changed at 84%, but looking at expectation for the end of 2018, last week the market was pricing a Fed Funds rate at 1.54% and now that level is seen at 1.47%. This implies that by the end of 2018 the market is looking for 2 more 25bps Fed hikes, compared to 5 hikes denoted by the Fed median dot plot.

Looking at commodities, oil prices fell around 1.4% on Friday with WTI closing the week at $47.66 while Brent ended at $49.95.It was a better end to the week for iron ore which gained 3.3%, gold climbed 0.8% to $1276.8 and both steam and metallurgical call climbed on Friday, up 2 and 6.2% respectively.

President Trump is considering nominating Marvin Goodfriend, a former Fed economist, for a spot on the Fed’s board of governors. Mr Goodfriend was the intellectual architect of Fed QE and he is a highly credible academic/Fed economist. He has been critical of Fed MBS purchases but not Treasuries. He is also in favour of more Fed oversight from Congress to enhance its credibility and he supports the need of Fed officials to compare their policy decisions against a mathematical rule such as the Taylor rule. In short, he is unlikely to be a big deviation from the current core thinking within the Fed.

Coming Up

Monday morning (11:45am Sydney) brings the China’s Caixin services and composite PMI prints for May and another round of soft numbers, after last week’s soft manufacturing reading, could set the tone at the start of the week for the AUD. US ISM non-manufacturing on Monday night is the other notable data release. Market is looking for a small pull back to 57.1 from 57.5 with details on hiring intentions on the report likely to get a fair bit of scrutiny. The UK services PMI is also due out later today.

Looking at the week’s highlights in Australia we have the RBA on Tuesday and GDP on Wednesday. The market is looking for a 0.3% GDP outcome, but our economists are eying a negative print of -0.1%. If correct, it could be another factor likely to weigh on the currency this week.

As for offshore markets the big events for the week are the ECB meeting, UK election and former FBI Director Comey appearance in front of the Senate Intelligence Committee (if the White House does not block his testimony). All happening on Thursday.

See our What to Watch publication for more details.


On global stock markets, the S&P 500 was +0.37%. Bond markets saw US 10-years -5.23bp to 2.16%. In commodities, Brent crude oil -1.34% to $49.95, gold+0.8% to $1,277, iron ore +3.3% to $57.79, steam coal +2.0% to $76.00, met. coal +6.2% to $155.00. AUD is at 0.743 and the range since Friday 5pm Sydney time is 0.7373 to 0.7447.

Good luck.

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