Strong US jobs data forces rethink of fundamentals

The prevailing wisdom in the market was challenged on Friday night, and it resulted in a small shift in fundamentals.

Source: Bloomberg

Market sentiment

The prevailing wisdom in the market was challenged on Friday night, and it resulted in a small shift in fundamentals. US Non-Farm payrolls were released, and despite the overarching bearishness towards the US economic outlook currently, managed to exceed expectations. Granted, the unemployment rate ticked higher and wages growth fell. But the jobs change figure revealed a much better than expected 224,000 jobs were added to the US economy last month. The results naturally weren’t enough to bring-about a wholesale revision of US economic fundamentals. However, it’s forced markets to question whether the need for rate cuts this month from the Fed is truly justified.

Interest rates

Interest rate markets are still implying that the Fed will cut interest rates this month by 25 basis points. The assumption here appears to be that all this talk from Fed-speakers about “insurance cuts” isn’t for nothing. What’s been removed from the market, courtesy of Friday’s solid jobs numbers, is the marginal pricing-in of a 50-basis-point cut from the Fed this month. The odds of that occurring plunged during Friday night’s trade, going from a roughly 30% chance, to effectively zero. It’s a bittersweet reality check for markets: things in the US economy aren’t that bad.

Government bonds

Global sovereign bond markets experienced a spurt of selling consequent to the reshuffling in short-term rates markets. The yield on the benchmark US 10 Year Treasury note spiked nearly 10 basis points, rallying from about 1.95% to just short of 2.04% during North American trade. The movements in US government debt flowed into other “risk-free” bonds, boosting their yields. 10 Year German Bund yields fell away from parity with European overnight rates, to be trading presently at -0.36%; while 10 Year UK Gilts climbed 6 points, to trade only slightly below the Bank of England’s overnight rate of 0.75%.

FX markets

The relative outperformance in US interest rates over their foreign counterparts brought about a big rally in the US Dollar. Friday’s was a session in which the G10 currency landscape more-or-less revolved around the USD, and repositioning for this month’s US Fed meeting. The Euro took a hit subsequently, trading back into the low 1.12 handle, and the GBP came close to testing life at the 1.24 level. Other safe haven currencies, such as the Yen and Swiss Franc, dipped, though the intensity of the selling wasn’t quite the same. And as it relates to the Australian Dollar: it’s fallen back toward 0.6970 this morning.

Commodities

Gold prices were also whacked lower too, as the lift in global bond yields diminished the swelling pool of negative yielding debt across the globe. It fell back below the $US1400 mark, with the fundamental trend in the yellow metals price thrown into question for the first time in months. In other commodities: oil prices rallied on the improved fundamental growth outlook generated by the strong US jobs report. While unrelated to that event: iron prices took a bath on Friday, after it was reported that Chinese mills had requested an enquiry, to China’s regulators, into the cause of that commodity’s recent rally.

Global stocks

The greatest doubt in financial markets, as-a-result of the stronger than expected US labour market numbers, has been reserved for global equities. Recall: the greatest driver of stock market strength lately has been the prospect of cheaper money flowing through the system courtesy of US Fed rate cuts. The repricing of marginally less accommodative monetary policy conditions, beginning this month, from the Fed, took the steam out of US equities on Friday. On a day thinned by the hangover from the Independence Day holiday, the S&P 500 retraced 0.2% by the sessions close – admittedly recovering ground throughout the day as the initial jobs-shock wore-off.

ASX

Wall Street’s soft close has the ASX 200 set-up for a soft-start today, with SPI Futures suggesting that index ought to open 12 points lower this morning. It’s only a modest blow, given the market rallied another half-a-per-cent on Friday to add to its 11-and-a-half year highs. Real Estate stocks, and to a lesser extent the banks, outperformed on Friday, after APRA announced that it would be easing lending standards for the local housing market. Overall, the ASX is looking technically overbought here on the Daily RSI, registering a reading of 71 right now. However, market momentum, and the overall trend, remains pointed to the upside.


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