- European equities record losses of around 0.5%. US equities opened around 0.2% lower after mixed payrolls which raised the odds of another rate hike this year.
- US payrolls were mixed. The number of people employed declined by 33 000 in September (vs + 80 000 consensus) and the previous 2 months’ figures faced a combined 38 000 downward revision. Weather conditions played a significant role. The unemployment rate unexpectedly dropped to 4.2% though, the lowest level since early 2001. On top, average hourly earnings rose by 0.5% M/M and 2.9% Y/Y, matching the fastest pace since 2009 and beating consensus by a wide margin.
- Canada’s labor market showed more signs of tightening in September, with the 10th straight month of employment gains and the strongest wage increases in more than a year. Net change in employment increased by 10k, close to consensus (12k), but details showed a huge switch from part time jobs to full time jobs.
- Spain apologised for a violent police crackdown on Catalonia’s independence referendum, in a conciliatory gesture as both sides looked for a way out of the nation’s worst political crisis since it became a democracy four decades ago.
- British PM May said she would stay on as leader to provide stability after a former chairman of her Conservative Party said he had garnered the support of 30 lawmakers who wanted her to quit.
Rates
US 10-yr yield tests key resistance at 2.4%
Global core bonds lost ground today in the run-up and after a mixed US payrolls report. Strong average hourly earnings stood out. US yields tested key resistance after the release, but breaks didn’t occur yet apart from at the 2-yr tenor. At the time of writing, US yields rise by 2.5 bps (2-yr) to 4 bps (5-yr). German yields trade 0.8 bps (2-yr) to 3.3 bps (10-y) higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany barely changed.
The Bund opened little changed, but came under pressure mid-morning and dropped about 40 ticks before a bottom was found and sideways trading kicked in. US Treasuries copied the Bund’s move. Various factors may have been in play. Some positioning ahead of the US payrolls, very strong German order intake (which was published at the opening of the session though) and technical factors. The decline accelerated when yesterday’s low was broken. During US dealings, focus turned to the payrolls report. The outcome was mixed. Net job growth hugely disappointed (-33k), but was distorted by hurricanes Harvey and Irma. Taking into account the previous two months’ revisions, payrolls missed consensus by 151k which is gigantic. The unemployment rate dropped to the lowest level since 2001 though and was accompanied by a rise in the labor force participation rate (to 63.1%). Average hourly earnings rose more than forecast (0.5% m/m & 2.9% y/y vs 0.3% m/m & 2.6% y/y consensus) and matched the fastest pace since 2009. Investors focused on the inflation component of the report, pulling US Treasuries lower. The move remained all in all modest with US yields rapidly running into key resistance levels. The US 2-yr yield managed to take out the 1.5% hurdle, but the 5-yr yield (1.97%) and 10-yr yield (2.4%) have more difficulties. The market implied probability of a December rate hike increased further to 80%.
Currencies
USD gains modestly on distorted payrolls
The US payrolls were the focus for USD trading today. As expected, the report was distorted by the impact of the hurricanes. However, the decline of the unemployment rate (to 4.2%) and a strong rise in average hourly earnings suggested a further improvement in labour market conditions. US yields and the dollar rose slightly after the report. EUR/USD trades in the 1.17 area. USD/JPY is changing hands around 113.25.
Overnight, Asian markets profited from positive spill-over effects from WS’s record race. Even so, the gains in USD/JPY remained modest. The pair continued to struggle to overcome the 113.00/26 resistance. Uncertainty on the outcome of the Japanese parliamentary elections might play a role. Overall USD strength finally pushed EUR/USD for a test of the recent lows below 1.17. The decline of the Aussie dollar accelerated after RBA-member Harper indicated that the economy isn’t out of the woods and as he suggested that an additional rate cut isn’t ruled out.
The dollar tried to extend its uptrend early in European dealings, but there was no strong enough driver just hours before the he key US payrolls report. Very strong German factory orders (3.6% M/M and 7.8% Y/Y) maybe also prevented a further decline of EUR/USD. The pair settled in a tight range close to 1.17. USD/JPY held near 113 as the equity rally stalled.
US payrolls painted quite a diffuse picture. There was a net decline in the number of people employed of 33K. The report was subject to major disruptions due to the hurricanes Harvey and Irma. At the same time, the unemployment rate declined to 4.2% from 4.4%, the lowest since 2001. Average hourly earnings rose a strong 0.5% M/M and 2.9% Y/Y (only 0.3% M/M and 2.6% Y/Y was expected). Bonds and the dollar reacted in the first place to the decline in the unemployment rate and rise in wages. US yields increased and interest rate differentials with the euro and the yen rose modestly. EUR/USD dropped to the 1.1670 area, but the dollar couldn’t hold on to the initial gains. EUR/USD trades currently again in the 1.1190 area. USD/JPY jumped to the 113.40 area. This cross rate is a bit more resilient (currently 113.30 area) even as equities show modest losses after the payrolls. Conclusion: USD yields and the dollar rise marginally after strong US wage data, but the disruptions due to the hurricanes prevent investors to play the USD reflation trade in a more aggressive way.
Political uncertainty keeps sterling the defensive
Sterling remained in the defensive today even as there was no high profile negative news. Lingering uncertainty on the political fate of PM May and the lasting stalemate in the Brexit negotiations continue to haunt sterling. The Halifax House prices rose (0.8% M/M and 4.0%Y/Y) were higher than expected but that wasn’t the markets’ focus. EUR/GBP initially held a tight in the 0.8930/55 area. The UK currency lost further ground in the run-up to the US trading session. Decent eco data probably won’t help as long as there is no clarity on UK politics. The technical picture of sterling is deteriorating, both against the euro and the dollar. US payrolls caused temporary gyrations in cable and EUR/GBP, but had no substantial impact. EUR/GBP trades in the 0.8965 area. Cable lost a few more ticks in line with the overall USD up-tick. The pair trades in the 1.3050 area, extending the established decline. Sterling might be vulnerable to additional losses if risk sentiment deteriorates.
