Fed's Waller inches open the US rate cut door
The April US employment report proved to be a ‘Goldilocks’ affair for markets, not strong enough to detract from the view a first Fed tightening probably won’t happen at least before September
The April US employment report proved to be a ‘Goldilocks’ affair for markets, not strong enough to detract from the view a first Fed tightening probably won’t happen at least before September, and not weak enough to undermine optimism toward a better economy in Q2 than Q1 and positive risk sentiment.
Headline non-farm payrolls came in just about as expected at 223k but there was a big downward revision (-39k) to March and hourly earnings only rose by 0.1%. The unemployment rate fell, to 5.4%, despite a higher labour participation rate, and could on other occasions have carried the day and led this to be seen as a stronger than expected report. But anaemic earnings growth, lack of upside surprise on headline NFP together with downward revisions – at the end of a week where the US bond market has been busily establishing short (futures) positions in front of the release – carried the day.
The 5-year segment of the US Treasury curve rallied the most post-payrolls; -7.4bps to 1.49% the 2-year lost 6bps to 0.57% and 10s -3bps to 2.15%. Earlier Friday the hyper-volatile 10yr German Bund lost 4bps in yield to 0.55% (last Thursday’s intra-day high, recall, was 0.77%, but Friday’s closing level is still above the levels prevailing both on the day of the ECB’s QE announcement (Jan 22) and its early March commencement. Global markets will continue to pay close attention to this rate this week, especially tomorrow when Greece is due to repay the IMF €750mn.
An understandably wild day Friday for all things UK, where 10yr gilts lost 4.5bps to 1.875%, so recovering (in yield terms) about a third of the knee-jerk rally (-12bps) witnessed as soon as UK exit polls indicated the likelihood of a Conservative general election victory (this on the assumption of greater fiscal contraction/reduced bond supply, and a ‘lower for longer’ view of Bank of England policy as a result of that). Sterling was the standout winner in FX on Friday, but with the GBP/USD rate ending about a cent down from its intra-day high of $1.5521 and which followed two bursts of intraday strength – the first on exit polls indicating the Conservatives would win the most amount of seats, and then on news they would likely secure an outright majority, as indeed has proved the case. GBP/USD finished +1.38% at 1.5455.
The next biggest G10 gainer was the NZD, +0.54% to 0.7489. AUD was +0.32% to 0.7932. AUD and NZD both received a fillip at this morning’s FX market re-open on the news Sunday evening that China was cutting its main lending (and deposit) rates by 25bps, to 5.1% and 2.25% respectively. Knee jerk gains in AUD to above 0.7950, and in NZD to around 0.7525, have since been quickly retraced however, both currencies now sitting back below Friday’s New York closing levels. In contrast to USD dollar slippage elsewhere on Friday, EUR/USD fell by 0.6% to 1.1199 while USD/JPY finished flat at Y119.76, allowing the DXY to add 0.17% to 94.79. So really Friday was a story of broad USD slippage post payrolls, EUR/USD the exception.
Feeding off strong European equity gains, US equities liked the payrolls report, S&P500 +1.35% to 2116.1. US stock also fed positively off a strong rally in European share markets on news of the likely Conservative election victory.
In commodities, iron ore rallied to its best level since the beginning of March, +$1.04 to $61.40. Other metals were mostly lower, the LMEX index -0.17%. Oil was mixed, Brent -$0.15 to $65.39 and WTI +$0.45 to $$59.39. Gold added $3.88 to $1189.
CoreLogic RP Data’s weekend housing market auction/price data shows no signs of let-up in terms of auction clearance rates, the 7-city average clearance rate of 78.2% down only slightly from 78.6% last Saturday. Sydney’s clearance rate was 88.7% up from 87.3% though prices were unchanged on the week. . Melbourne cleared 77.5% of auctions down from 81.3%, but prices were +0.4% on the week
It’s not a big week internationally though Greece will probably be centre stage with Finance officials locked in meetings today ahead of tomorrow’s deadline for a €750mn payment due to the IMF. In China we’ll all get the monthly batch of production, sales and investment data (all on Wednesday)
Locally, the NAB business survey is due this morning – a day earlier than usual due to tomorrow night’s Budget (7:30pm AEST). We’ll also get the W age price Index for Q1, on Wednesday. See our ‘What to watch’ publication for a full previews of these events.
Oh and as for today’s title, every date this week is a palindromic number: 5/11/15, 5/12/15, 5/13/15, etc.
On global stock markets, the S&P 500 was +1.30%. Bond markets saw US 10-years -3.22bp to 2.15%. On commodity markets, Brent crude oil -0.23% to $65.39, gold+0.6% to $1,189, iron ore +1.7% to $61.40. AUD is at 0.7943 and the range since 5pm AEST Friday has been 0.7876 – 0.7968. Indicative range today 0.7885 – 0.7960. (For more market prices, please see p.2 of the pdf).
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