Global core bonds traded sideways going into the US payrolls report. Mixed EMU price data were ignored and oil & equity markets gave diverging impetus for bond trading. Brent crude corrected lower towards $67/barrel while the stock market party continued. US payrolls missed consensus by a wide margin, but earnings rose in line with expectations. US Treasuries spiked higher, while the Bund was unmoved. We don’t expect the uptick to last as markets mainly focus on price instead of activity data. Changes on the German and US yield curves remain limited between -1 bp and +1 bp at the moment. The 2yr/10yr US yield differential narrowed to 50 bps, the lowest level since 2007. On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between +1 bp (Portugal) and -3 bps (Spain) with Greece outperforming (-8 bps).
Trading in the major USD cross rates also focused on the US payrolls. Yesterday, the dollar was in the defensive, but investors apparently found themselves positioned a bit too much USD short going into the US payrolls. Soft EMU inflation data had hardly any impact on the euro. EUR/USD traded in the mid 1.20 area just before the publication of the payrolls. Employment growth disappointed, but the key wage data were in line with consensus. The dollar spiked briefly lower upon the publication. EUR/USD jumped to the 1.2080 area, but the 1.2092 range top was again left intact. Even more, the dollar soon reversed post-payrolls losses. EUR/USD trades currently even below the pre-payrolls’ level (1.2030 area). USD/JPY trades marginally below the pre-payrolls’ level (currently 113.20 area). To conclude, payrolls disappointed, but the report caused hardly any damage for the dollar as price data are more important than activity data. The jury is still out, but the 1.2092 resistance again proves not that easy to break.
Risk sentiment on European stock markets remains ebullient with the German Dax posting another >1% gain, putting the YTD balance already at +3%. The Intel chip flaws can’t spoil sentiment. US stock markets opened around 0.25% higher.
News Headlines
December EMU headline inflation declined in line with expectation from 1.5% Y/Y to 1.4% Y/Y, mainly due to negative energy base effects. Core CPI stabilized at 0.9% Y/Y, below 1% Y/Y consensus. Higher-than-expected November PPI readings (0.6% M/M & 2.8% Y/Y) balanced the core CPI miss from a market point-of-view. Higher producer prices might filter more rapidly through to consumer prices in a context of strong growth.
The December payrolls report disappointed. Net job growth amounted to 148k, below 190k forecasts. Taking into account revisions to the previous two months’ figures results in a combined 51k miss. Bad weather wasn’t to blame with less than average employees remaining home due to poor weather conditions. The unemployment rate stabilized as expected at 4.1%. Average hourly earnings, key to markets, printed as well bang in line with consensus (0.3% M/M & 2.5% Y/Y), but November data faced slight downward revisions.
The US non-manufacturing ISM disappointed in December, declining from 57.4 to 55.9 (vs 57.6 consensus).
The Canadian job market is firing on all cylinders. The number of jobs rose by 78 600 (vs 2 200 consensus) in December, bringing the full-year employment gain to 422 500. That’s the best annual increase since 2002. Canada’s unemployment rate unexpectedly declined from 6% to 5.7%, the lowest level in more than 40 years. Average hourly earnings climbed by 2.7% Y/Y, down from 2.8% Y/Y in November. Canadian yields shot up to 9 bps higher with the 2-yr yield now at 1.7%, the highest since 2011. The loonie profited as well. USD/CAD dropped from around 1.25 to 1.2350. The market implied probability of a January rate hike from 1% to 1.25% increased from 41% to 73%.
