Markets
A huge payrolls miss was Friday’s defining moment for trading. The longed-for 1mn job growth in April turned out to be a 266k addition. Adding downward revisions in previous months resulted in a rarely seen 812k disappointment. US yields fell by up to 10 bps in a first reaction with the 10y gauge for example setting a correction low around 1.46%. Most of the intraday losses were undone by the closing bell with the long end of the curve even overturning them into gains. Daily changes ranged between -3 bps (5-yr) and +3.6 bps (30-yr). Markets probably concluded two things. First, it could become sort of a poster boy as US President’s Biden fights his way through US Congress to get his administration’s huge fiscal spending proposals approved. Second, it adds credibility to the Fed’s prioritization of reaching full employment over price stability. Details of Friday’s yield move show those two elements: US inflation expectations breached 2.5% for the first time since 2013 while US real yields are drifting back towards -1%. Divergence in those two key (nominal) yield drivers is what characterized a large part of last year and is what’s at play again since mid-April. Needless to say that the US dollar, unlike US (nominal) yields, didn’t manage an intraday U-turn and rather closed near the intraday lows. The trade-weighted greenback closed at 90.23 from an 90.87 open, the lowest level since end February. From a technical point of view, it’s back to the January low of 89.21 if sentiment towards the dollar doesn’t rapidly improve. EUR/USD showed similar dynamics, gaining 1 big figure and closing at 1.2166. Only minor resistances shield the pair from a return to the 1.2349 recovery top. US stock markets decided to enjoy the fiscal/monetary support extension because of the sluggish payrolls and gained 0.66% to 0.88%, ending a week which started fragile on a positive note.
Today’s eco calendar is empty apart from a speech by Chicago Fed Evans. The cyberattack against an essential US fuel pipeline pushed related commodities higher, but doesn’t interfere with risk sentiment. In the short-to-medium term, it’s hard to see what could help US real yields catching up with inflation expectations again. That holds the dollar hostage in a vulnerable position. This week’s plethora of Fed governors will stick to the dovish line. Technical action in US yields suggests a firm bottom and favors more sideways action going forward. Apart from Fed governors, US eco data include CPI inflation and retail sales. The US Treasury’s mid-month refinancing operation will also grab the necessary attention. Sterling is better bid this morning as Scottish election polls didn’t result in an outright majority for the SNP. However, the independence-bid could stay afloat with support of the Greens. UK PM Johnson’s conservative party did better than expected, holding their seat tally stable. EUR/GBP drifts away from the 0.87 resistance area to currently trade near 0.8650. UK Q1 GDP is this week’s eco highlight.
News headlines
Brent oil and especially gasoline prices soared at the open before paring back some of the gains this morning after a ransomware attack on the operator of the US’ biggest refined products pipeline on Friday. Colonial Pipeline Company took the entire system offline and said only some smaller lines between terminals and delivery points would be brought back in service for now. The pipeline transports 2.5m barrels of fuel each day from the Gulf Coast to the East Coast, carrying almost half of the fuel consumed by the area. Brent (+0.5%) trades near $68.6/b, gasoline (+1.5%) advances to $216/gallon.
ECB’s Rehn argues the central bank should followed the example of the US Fed by allowing inflation to overshoot its target to make up for many years missed. Citing weakened wage inflation pressures globally and lower natural interest rates in general, he also argues for a focus on full or maximum employment in addition to price stability. Rehn is one of the several, including chief economist Lane, to advocate such flexible average inflation targeting.
