- European equities traded modestly lower for most of the day, but the losses narrowed after the US payrolls. US equities are regaining ground after yesterday’s setback. The Dow and the S&P show gains of about 0.3%. The Nasdaq outperforms (+ 0.7%)
- May UK data disappointed across the board today with industrial production (-0.1% M/M and -0.2Y/Y) and manufacturing production (-0.2% M/M and 0.4% Y/Y) both lower than the April numbers and the consensus. The UK trade deficit was also wider than expected.
- The US June payrolls report was strong with non-farm payrolls increasing strongly by 222K instead of the expected 178K rise. The May figures was revised upward from 138K to 152K. Average hourly earnings on the other hand disappointed with a rise of 0.2% M/M and 2.5% Y/Y (consensus 0.3% and 2.6% Y/Y).
- German industrial production rose more than anticipated, underpinning a strong and broad-based upswing in Europe’s largest economy. Output, adjusted for seasonal swings and inflation, jumped 1.2% M/M in May (5.0% Y/Y) after rising a revised 0.7% M/M in April (2.8% Y/Y). Consensus forecasts were lower at 0.2% M/M and 4.0% Y/Y.
- Chinese President Xi Jinping took a swipe at the US for retreating from globalization at the G20, exposing the tensions before a meeting of world leaders divided over everything from trade and climate change to handling North Korea’s provocations.
- ECB policy makers might be open to terminating the institution’s purchases of asset-backed securities when they set the course for stimulus in 2018, according to three euro-area officials familiar with the matter. They added that the Governing Council members generally agree that the program missed the aim of reviving the ABS market.
Rates
Payrolls indecisive for core bonds
Market were eagerly awaiting the June US payrolls, but the report was mixed and didn’t decisively affect the core bond markets. The payrolls and the average workweek were strong and higher than expected, suggesting buoyant activity, but the wage component (Average Hourly Earnings) disappointed once more and suggests there is no noticeable upward wage trend despite a tightening labour market. This means that core inflation will remain subdued for longer and that will lead to pressure on the Fed to tighten policy even slower. In this context, the T-Note future couldn’t really choose a direction. After some minor volatility the T-Note settled near 125, the opening level. The picture is similar for the Bund which held its sideway range and trades modestly above opening levels too. The US equity future and EUR/USD didn’t go far either.
At the time of writing, German yields decreased about 2 bps in the 2-to-5-year sector and were flat to up 1.1 bps in the 10-to-30-yr sector. The break of the key 0.50% yield resistance yesterday was confirmed. The US yield curve bear steepened slightly with yields up between flat (2-yr) and 2.3 bps (30-yr).
The labour market report showed the headcount was very strong with net job growth of 222K and an upward revision of the previous two reports by 47K. The lengthening of the average workweek to 34.5h (from 34.4) is also a positive sign on the health of the economy. Unemployment rose slightly to 3.4% from 3.3% due to a strong entrance of new jobseekers (361K) that surpassed the 245K new (household) jobs (the participation rate increased 0.1%-point to 62.8%). This is in fact also a positive factor. The only really negative element was the small 0.2% M/M (and 2.5% Y/Y) gain in average hourly earnings, which fell short of the 0.3% M/M and 2.6% Y/Y consensus expectation, while the May figure was revised lower to 0.1% M/M from 0.2% M/M previously.
Currencies
Dollar gains modestly on solid US payrolls
This morning, interest markets and the dollar shifted temporary in wait-and-see modus after yesterday’s moves. The US payrolls were expected to decide on the next directional move. However, this wasn’t the case. The global payrolls report was strong, but wages disappointed again. The dollar initially didn’t know which way to go, but finally gained ground slightly. EUR/USD trades again near the 1.14 pivot. USD/JPY is nearing the 114 big figure.
Overnight, Asian equities joined the correction from WS yesterday, but the losses remained modest. The yen weakened further even as equities declined. Interest rate differentials widened further against the yen as core currencies (EMU/USD) rose. At the same time, the BOJ bought JGB’s to prevent Japanese LT yields from following the rise in the US and Europe. USD/JPY set a new correction top and settled in the 113.55/85 area. EUR/JPY touched the 130 barrier early in Europe. EUR/USD also remained well bid (1.1420 area).
This morning, German May production data were very strong. They were however not able to extend yesterday’s rise in European yields or in EUR/USD. Investors were reluctant to add positions ahead of the key US payrolls report. (European) yields settled near the ST top. EUR/USD held an extremely tight sideways range in the low 1.14 area.
The US June payrolls grew a strong and higher than expected 222K and the previous two months were revised higher by a total of 47K. The unemployment rate rose from 4.3% to 4.4%, but this was due to a rise in the labour force (higher participation rate). However, wage growth disappointed again at 0.2% M/M and 2.5% Y/Y (2.6% was expected). Despite the slight miss in wage growth, the report should be considered as strong, confirming the recovery in the US labour market. Even so, the reaction on the interest rate markets and of the dollar was hesitant, with no clear directional trend. After some nervous swings, the dollar finally gained ground slightly. EUR/USD came close to the 1.1445 reaction top, but a break didn’t occur. The pair currently trades in the 1.1400 area. USD/JPY is setting a minor new top near the 114 barrier.
Sterling ceding ground on poor UK data
Earlier this week, sterling didn’t react much to (slightly) weaker than expected data. Trade was mostly driven by technical considerations and by the price moves in the dollar or the euro. Today, there was a series of (not so important) UK eco data with the May production data, construction output, trade balance and Halifax House prices. All were weaker than expected but especially the miss in the production data was quite substantial. The data are raising new questions whether a BoE rate hike is appropriate in the near future. Sterling came under pressure after the data releases. EUR/GBP rebounded to the mid 0.8850 area. Cable dropped to the 1.29 area. The US payrolls had only a marginal impact on sterling trading. EUR/GBP now trades in the 0.8845 area while cable lost a few more tics on the USD rebound (1.2880 area).
