Markets
The blowout October payrolls report resulted in textbook bear flattening of the US yield curve with Treasuries outperforming Bunds. Front-end rates added 5 bps, long-term maturities rose by 1.1-2.2 bps in the 10-30-yr bucket. Employment last month grew by 165k, crushing the 70k estimate and coming with a +84k revision to the previous two months. The unemployment rate unexpectedly declined to 4.1% from 4.2% even as the participation rate climbed. There’s nothing in the report that would make the Fed worry about the employment part of its mandate. Inflation remains the focal point. This week’s October edition, scheduled for Wednesday, lacks the y/y comparison because of last year’s shutdown-related missing data. Monthly prints however offer some insights into the short-term dynamics. The current consensus for 0.3% m/m headline inflation results in a 5.3% three-month annualized figure. The same exercise for core inflation, seen at 0.2% m/m, leads to 3.25%. The US dollar on currency markets dominated over global peers. Rising interest rate differentials on the back of a strong labour market report and a tentative recovery in hard-beaten tech/AI stocks played in favour of the greenback. Lower energy prices – Brent sub $100, natural gas around €85/MWh – offered some counterweight but couldn’t prevent EUR/USD from slipping back below the 1.12 handle towards 1.114. The narrow sideways trading range in place since October remains the pair’s playground for the time being. DXY’s closing level (102.3) was among the highest of the last couple of weeks.
Except for (a stripped) US CPI release, attention this week goes to the mid-month US auctions featuring the sale of three-, 10- and 30-yr bonds. The absence of inspiring economic data releases means sentiment on the (US) stock market will be the key driver for broader trading, today but most likely for most of the week. A tech rebound on Wall Street dragged Nasdaq in the green (+1%). The S&P500 (0.3%) and especially the Dow (-0.5%) lagged, suggesting more of a rotation rather than broad outright buying. Asian markets experience some stronger risk-on though. Central bank speeches scattered across the week add some flavour to trading as well. A Financial Times interview with ECB president-candidate Knot deserves some coverage in that respect. He and the Spaniard de Cos are the only contenders for the job. Knot, known as a hawk in his earlier years at the ECB, would enter the top job in (fiscally) challenging times. He said he was open to interventions through bond buying or devising a new tailor-made instrument if circumstances would dictate so. He said intra-EMU spreads would need to be contained when they are driven “by unwarranted and disorderly market dynamics”. But Knot also added that they cannot fix unsustainable fiscal policy. “There is a difference between a repricing from one level to another and disorderly market dynamics with a lot of volatility and a lot of contagion across different markets.” The Dutchman said that ECB’s interest rate policy is likely to be hostage to developments in the Middle East for the coming months. “A bit of extra tightening” may be needed if energy prices would roughly stay where they were.
News & Views
KPMG and REC’s monthly UK report on jobs showed uncertainty (in the run-up to the Budget but also in a geopolitical context) and rising costs dampening staff recruitment in October. Green shoots in the labor market could stall further on Bank of England rate hike(s) and the expected inflation acceleration. The number of people placed into permanent jobs across the UK fell for the first time in four months. Temp billings also fell after rising for six consecutive months. Total new vacancies fell at the slowest pace in over two years while the supply of candidates rose sharply on widespread reports of redundancies and a lower number of job openings. On the pay front, recruiters signaled stronger increases in starting salaries and temp wages, but both rates of pay growth remained subdued in the context of historical data.
Chinese inflation remains subdued. The overall price level was unchanged in October, to be 0.7% higher compared with a year ago (from 0.9% Y/Y in September). Details showed a significant drag from food prices (-2.7% Y/Y), but also the pace of consumer goods price increases (+0.8% Y/Y from 1%), those of services (0.7% Y/Y from 0.8%) and the broader core category (ex food & energy) slowed (0.8% from 1%). Factory-gate inflation on the other hand rose by 0.7% M/M to accelerate from 5% Y/Y to 5.7% Y/Y, the highest since June 2022. Energy and AI hardware were the main culprits.
