Markets
Yesterday’s US payrolls were supposed to deliver key input for the Fed decision making process as Fed Chair Warsh at the start of its mandate promised that the US central bank will deliver on its price stability mandate. Strong US payrolls over previous months suggested that the ‘second pillar’ of the Fed’s mandate, maximum employment, didn’t need any Fed attention/support for now. However, the June payrolls missed expectations. One data set of course doesn’t change the broader picture, but it also didn’t raise the momentum for the Fed to take action. The US in June added a net 57k of jobs vs 113k expected. The numbers of the previous two months also were downwardly revised by 74k. The negative surprise was mainly due to an unexpected negative contribution of leisure and hospitality (-61k). Professional business services (+36k) and private education and health (+69k) contributed positively. The unemployment rate (derived from a different consumer survey) eased from 4.3% to 4.2%, but this was mainly due to decline in labour market participation (labour force declined 720k and employment ‘only’ declined 507k according to this survey). Average hourly wages at 0.3% M/M and 3.5% Y/Y were as expected. The ‘remarkable swings’ in some of the underlying data at least suggest that there might be a case for Fed Warsh’s initiative to let one of his task forces take a look at the ‘use and reliance on existing data sources’ when assessing monetary policy. Whatever, the overall message was that the US labour market probably still is in some kind of equilibrium but that there is no need for the Fed to rush to action due to a further tightening of the labour market. The US yield curve steepened even as changes at the end of the day were very limited. The 2-y yield declined 3.7 bps. The 30-y rose slightly (+1.5 bps). Markets now only discounted less than 20% chance of a Fed rate hike at the end of July meeting. Such a 25 bps step is now only fully priced in by the end of the year. Aside from the payrolls, EMU (but also UK and Japanese bond markets) during the day were also captured in a broad steepening move. German yields yesterday rose between 2.3 bps (2-y) and 4.5 bps (30-y). On FX markets, the weaker payrolls pushed the dollar into the defensive. DXY dropped from 101.4 to 100.86. EUR/USD regained the 1.14 big figure (close 1.1432). Even the yen, which was fighting an uphill battle of late, rebounded from Wednesday’s multi-year lows against the dollar. USD/JPY dropped from 162.6 to close near 161.1. Equities got a temporary intraday boost after the report, but especially the Nasdaq struggled to hold these gains. The Dow (+1.14%) closed at an all-time high. The Nasdaq lost 0.8% in an apparent rotation move.
Today US markets are closed (long weekend for Independence Day). In Europe and the UK only some second-tier data are on the agenda. One can expect order-driven, technical trading. Yen traders will be on alert for potential yen interventions by Japanese authorities in an environment of lower market liquidity. We also keep an eye on the dollar as headlines suggest that the issue of Fed independence apparently isn’t completely muted yet.
News & Views
The Trump administration and its allies are actively exploring ways to remove members of the Fed board and to replace them with the president’s own picks, Bloomberg reported citing people familiar with the matter. That followed the Supreme Court’s ruling this week that overruled the attempted sacking of governor Cook over alleged mortgage fraud. The Court said president Trump had failed to provide Cook procedures to properly dispute the allegations against her. The administration now sees the decision as providing a procedural roadmap for how to actually remove Cook from the job. Meanwhile, White House frustration is growing again over former chair Powell to stay on as Board member, going against protocol. While the inquiry into the out-of-budget renovation of the Fed headquarters was dropped in April, the investigation remains prone to be reopened. The administration is also zeroing in on regional Fed members. The search for a new Atlanta Fed president after Bostic stepped down in February was said to be halted until the new Fed chair Warsh, a Trump pick, was sworn in so that he would have a say in the process as well.
For some key European leaders, it seems all but inevitable that ships transiting through the Strait of Hormuz will have to pay fees to Iran and Oman, another Bloomberg exclusive reported. While not reflecting the government’s official stance, several Gulf states hold the same view. Both Oman and Iran have said there’s no way of going back to the pre-war free-for-all situation. Oman is reportedly looking at the Malacca Strait in Asia as a leading example. This key maritime route is managed by Indonesia, Malaysia and Singapore with these countries charging vessels for any navigation and security services needed.
