Mon, Nov 29, 2021 @ 10:55 GMT
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Mixed Nonfarm Payrolls But Strong Enough To Start Tapering

Market movers today

  • It will be a quiet start to another interesting week, as we have no tier one data today (US markets are closed due to Columbus Day).
  • Later this week, we have US CPI inflation and retail sales, which will add more clues on the inflation outlook and how long US goods consumption will stay at very high levels. In Europe we get German ZEW, which has nose-dived lately and IMF also publishes new global forecasts. FOMC minutes are due out on Wednesday (also plenty of Fed speeches during the week).
  • Developments in gas and electricity as well as the Chinese developer crisis should still be watched closely.
  • Scandi CPIs are due out during the week starting with Norwegian CPI inflation this morning. Also the Swedish Prospera Inflation Expectations survey is released this week.

The 60 second overview

Non-farm payrolls: The jobs report on Friday was another disappointment but still strong enough for the Fed to start tapering at its next meeting in early November, in our view. While headline NFP rose just 194,000, the two past months were revised higher by a total of 169,000. Also there may be some problems with the seasonal adjustment, as private payrolls rose by 317,000 (i.e. government employment fell). There were also some concerning parts from a Fed perspective: The labour force shrank causing the unemployment rate to fall below 5% and wage growth was much higher than anticipated – both adding to the stagflation concerns we have been discussing lately.

Downside risks to growth: Following a very strong rebound from the COVID-19 crisis, we see rising downside risks to global growth over the coming quarters. We discuss briefly five factors that have developed worse than expected over the past month, see Research Global: Five reasons we see rising downside risks to growth, 11 October.

Debt limit: The debt limit can was kicked down the road after the Republicans agreed to hike the debt limit making US Treasury able to fund itself until early December. The question is whether the Republicans are interested in finding a more permanent solution? Senate Minority Leader Mitch McConnell said over the weekend that they will not, so we are likely set for another round of game of chickens with a lot of uncertainty next month, see Reuters.

Bank of England rate hike? It is not only in the US that we are about to see tighter monetary policy. Michael Saunders (hawk) and Governor Andrew Bailey both sounded concerned about higher inflation.

Brexit: We have not really talked much about Brexit in 2021 but the EU-UK negotiations on changing the Northern Ireland protocol are about to begin, which may weigh on GBP. Our base case is that they will reach an agreement eventually (probably close to the deadline) but worst case is that the free trade agreement from December is ripped apart over the issue. For more details see also FT.

Equities: Equities a notch lower Friday driven by Europe and US. Most interestingly the inflation/stagflation trade continuing to perform driven by energy and secondly financials and materials. The jobs report did not move the needle much but we argue it will fuel the inflation/stagflation rotation as the underlying message in the report suggests labour demand/supply imbalances are more pronounced than most investors think. In the US most indices lower on Friday with Dow -0.03%, S&P 500 -0.2%, Nasdaq -0.5% and Russell 2000 -0.8%. Asian markets are spilt this morning with Hong Kong sharply higher while South Korea is lower. PBOC lifting Chinese sentiment after another money market injection Saturday. US and European futures are marginally lower this morning.

FI: Global bond yields initially declined after the weaker than expected US labour market report on Friday. However, the combination of rising energy prices and that the jobs report will not stop the Federal Reserve from tapering then bond yields moved higher and 10Y Treasuries ended above 1.6%. It has stayed above 1.6% in Asian trade this morning.

FX: EUR/USD was largely unchanged in the 1.1540-1.1580 range after the release of the US jobs report on Friday. USD/JPY climbed back above 112 as US interest rates rose further.

Credit: CDS indices followed equities in red on Friday while cash bonds held up better. Xover widened 5.5bp and Main widened 1bp. HY bonds tightened 1bp and IG closed 0.5bp tighter.

Nordic macro

In Norway, inflation has come down sharply over the summer and autumn as we expected, driven by base effects and lower imported inflation. We are now seeing growing global price pressures, the krone has weakened somewhat, and wage growth is picking up, which all points to core inflation bottoming out. Thanks to an additional base effect this month, we therefore expect core inflation to rise to 1.3% y/y in September. The high power prices will probably push headline inflation up to 4.0%.


Danske Bank
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