It wasn’t nearly the longed-for 733k net job gain, but August payrolls (235k & +134k net revision June/July) keep QE tapering announcement bets at the September 22 FOMC meeting alive. Details showed hiring in the pandemic-sensitive leisure & hospitality business and education services grinding to a halt. The unemployment rate fell to a cycle low of 5.2% (from 5.4%). The participation rate was unchanged (61.7%). Average weekly hours stabilized at 34.7 with average hourly earnings accelerating (0.6% M/M & 4.3% Y/Y). Fed Chair Powell has leeway to use the spreading Delta variant as a hedge to delay a decision or add a time lag between the announcement and the effective start, but could just as well feel comfort by the slight additional progress in August and give the thumbs up to slow net asset purchases. We remain adepts of the second scenario and feel supported by the market reaction. US Treasuries spiked higher in a first reaction, but eventually turned south even with the long US weekend ahead. US markets are closed today in observance of Labour Day. The US yield curve bear steepened with yields rising by up to 4.6 bps (30-yr). A breakdown shows that US real yields were responsible for the lion share of the move! Spill-over effects pulled German bunds lower as well, but US Treasuries obviously underperformed. German yields added 1 bp to 2.8 bps in a similar bear steepening move. The German 10-yr yield for a second time tested -0.35% resistance which is 38% retracement on the May/July yield decline. 10-yr yield spread changes vs Germany ended broadly unchanged.
The first reaction on the FX market – in line with the US T spike – was a weaker dollar. EUR/USD jumped towards 1.1909 resistance, but a break higher didn’t occur. Rising US yields gave a way out for the dollar as did a strong US services ISM (61.7 from 64.1 vs 61.6 expected). Details continued to show that supply-side troubles hamper an even faster economic recovery. They add to some Fed governors’ call that current stimulus is a medicine to support the demand side of the recovery and can therefore be dialed back. On the euro-side of the equation, this week’s ECB meeting called for some caution. Market positioning since end August changed from turning a blind eye to Europe/ECB to suddenly becoming aware that Frankfurt could slow weekly PEPP purchases because of higher growth & inflation forecasts and as financial conditions eased over Summer. A break north of EUR/USD 1.1909 will probably be tough ahead of Thursday’s gathering and especially given the extremely thin eco calendar.
New Zealand’s prime minister Ardern lifted a nationwide lockdown today, moving the country back to Alert Level 2. Auckland, where the cluster of the delta variant was detected, remains on Alert Level 4 for at least one more week, she said. The strict measures have reduced new case numbers to just 20 after reaching a peak of more than 80 end of August. In neighboring country Australia, PM Morrison announced a plan to end pandemic lockdowns and state border closures by Christmas end of last week by doubling down on the vaccination strategy. There are doubts however that some Covid-free states, including Western Australia and Queensland, will open up to others that grapple with the country’s worst outbreaks (Victoria, New South Wales).
UK PM Johnson is due to return to parliament this week and is already facing a backlash from his own Tory party members. Johnson reportedly is planning a tax hike on British workers worth 10bn pounds to boost funding for social care. The Conservative Party said its breaks the 2019 manifesto and risks losing voters, particularly those in poorer regions who abandoned Labour for the Tories in that year. The UK Chancellor Sunak this week is also expected to announce ditching the “triple lock” pension guarantee, a governmental pledge to increase pensions by the highest of inflation, wages or 2.5%. The pandemic created distortions such that wages increased almost 9% over the past year.