- European stock markets gained slightly ground with the German Dax (+0.8%) and Cac40 (+0.8%) outperforming. US stock markets opened with small gains as well (+0.2%) despite a rather weak payrolls report.
- US August payrolls disappointed on all fronts. Net job creation printed at 156k (vs 180k forecast) and the previous two month’s suffered a combined 41k downward revision. The unemployment rate unexpectedly ticked up to 4.4% and average hourly earnings rose slower than anticipated (0.1% M/M & 2.5% Y/Y).
- US factories ramped up in August to the fastest pace of expansion in six years, driven by employment gains. The US manufacturing ISM rose from 56.3 to 58.8, while markets expected a much smaller increase to 52.8.
- "Since the introduction of the euro, there were significant movements of the euro-dollar rate. We’re now roughly where we were when the euro was introduced. We’ve been below parity and we’ve been at $1.50-$1.60. Therefore, I wouldn’t over-interpret or dramatize," ECB Governing Council member Nowotny said.
- Lifting euro zone inflation may be more difficult than earlier expected, ECB Vice President Constancio said, days before the bank begins a much anticipated discussion on the future of its stimulus policy.
- ECB policy makers may not be ready to finalize their decision on next year’s bond-purchase program until December, according to euro-area officials familiar with the matter (rumours).
- The August UK manufacturing PMI beat expectations, rising from 55.3 to 56.9 (vs 55.0 forecast). Companies reported the strongest intake of new orders since May, bolstered by the weaker pound. The currency’s depreciation also contributed to purchase-price gains accelerating for the first time in seven months.
- UK trade secretary Fox has accused the EU of "blackmail" over Brexit divorce payments, capping off a testy week of negotiations. The comments come after Michel Barnier, chief Brexit negotiator for the EU, repeatedly bemoaned the UK’s approach to the process, noting yesterday that "no decisive process" had been made in the third round of talks.
- Kenya’s supreme court has nullified the result of last month’s presidential election, in an unprecedented ruling that deals a severe political blow to incumbent president Uhuru Kenyatta. It means a new vote has to be held within 60 days.
Rates
Second failed test of 2.1% despite weak payrolls
German Bunds underperformed US Treasuries today. Core bond trading was neventful until around European noon. ECB Nowotny said that he wouldn’t over-interpret or dramatize the recent euro strength. His comments triggered a setback in German Bunds with next week’s ECB meeting in mind. Will Draghi and co already provide a blueprint for next year’s APP programme (tapering)? Rumours suggested a delay until December, but the market didn’t react that way. Intraday losses in Bunds were temporarily erased by a disappointing US payrolls report. US Treasuries benefited as well with a test of key support in the US 10-yr yield (2.1%). However, the move barely lasted 10 minutes with immediate return action toward pre-payrolls levels. The US Note future’s performance was especially disappointing taking into account the upcoming long weekend in the US. Markets are closed on Monday for Labour Day which traditionally favours safe havens in the run-up.
A similar reaction to the payrolls was visible in the dollar. Both market reactions suggest that the downtrend in both USD and US yields seems to be exhausted. A period of consolidation is now more likely unless of course the ECB decides otherwise. An APP-announcement next week should for example send yields back higher.
The German yield curve bear steepens at the time of writing with yield changes ranging between +0.5 bps (2-yr) and +4 bps (30-yr). The US yield curve steepens as well, but to a lesser extent. US yields increase by up to 1.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal (-3 bps) outperforming and Spain (+2 bps) underperforming.
Currencies
Dollar ignores weak US payrolls
The US payrolls disappointed in all aspects. The dollar instantaneously lost ground, but the gains were rapidly erased. EUR/USD spiked from about 1.1920 to 1.1980, but retraced the gains and now trades below the 1.19 handle. Similarly, USD/JPY dived from 110.10 to 109.56 only to return back to the 110 level. There were and are doubts about the August payrolls, as a statistical quirk might be responsible for the weak results. That could explain the bizarre price action. Alternatively, the market reaction may be evidence that the downward dollar trend is exhausted for now.
The dollar initially gradually strengthened versus euro and yen during the European morning session. There was little news behind the movement. EUR/USD bottomed at about 1.1880 and was already somewhat higher when ECB Nowotny said that the complaints about a too-strong euro were overdone. German yields rose up to 4 basis points (US/German yield spread narrowed a few basis points) and EUR/USD spiked to 1.1930 before retracing part of the gains. The market reasons that the ECB may already announce its plans about the APP programme next week if they aren’t too concerned about euro strength. The positive euro bias remained in place going towards the payrolls, while USD/JPY held on to its modest gains. The Nowotny comments were euro specific and these kinds of remarks should keep the euro market itchy in the run up to next week’s ECB meeting.
The US August payrolls report was weak in its most important components. Payrolls rose 156 000 instead of the expected 180 000, July and June payrolls were downwardly revised by a combined 41k, the unemployment rate ticked up to 4.4% from 4.3% and the average hourly earnings rose a lower-than-expected 0.1% M/M and 2.5% Y/Y. It’s not excluded that a statistical quirk was responsible for the weakness as is often the case in August. The dollar was sold, pushing EUR/USD in a first reaction to 1.1980 and USD/JPY lower to 109.56. However, the tide turned completely and the dollar losses were erased. The dollar tries to gain additional ground as we conclude our report..
Bloomberg reported: "ECB policy makers may not be ready to finalize their decision on next year’s bond-purchase plan until just a couple of weeks before the current program expires, according to euro-area officials familiar with the matter". The message was released 10 minutes after the payrolls release. It is intrinsically euro negative, but given the moves in other dollar crosses and in other markets, we don’t think it influenced trading.
Sterling strengthens against EUR after payrolls?!?
Sterling traded sideways in the morning session, ignoring an unexpectedly strong Manufacturing PMI. The headline PMI rose to 56.9 in August from 55.3 in July, a four month high. The improvement was broad-based (all main components) including strong export orders, suggesting that the weak pound is starting to help the economy. EUR/GBP kept close to the 0.9211 going towards the US payrolls release. Strange enough, cable didn’t return gains after the weaker payrolls unlike EUR, JPY, …. This resulted in a significant decline of EUR/GBP, which fell in the afternoon from 0.9210 to 0.9150.
