Mixed US payrolls data, deadlocked China talks, EMs doing it tough, but UST 10yr yields little changed at 2.95%. Eyes on commodity risks

Mixed US payrolls data, deadlocked China talks, EMs doing it tough, but UST 10yr yields little changed at 2.95%. Eyes on commodity risks

By Nick Smyth

The US payrolls report on Friday was mixed, but the drop in the unemployment rate to 3.9% was enough to push the USD higher again.  Equities also moved higher after the payrolls report even amid reports that US-China trade talks remained deadlocked.  Emerging markets have come back into the market’s focus as well, with the Argentinean central bank raising its cash rate to 40%, to combat the decline in the peso.  The NZD continues to hover around 0.70 ahead of Adrian Orr’s first RBNZ meeting this Thursday. 

The non-farm payrolls report was a mixed bag, with the headline jobs number a bit lower than expected (164k v. 192k exp.), wage growth disappointing slightly, but the unemployment rate falling to 3.9% (vs. 4% exp.).  Job growth for the previous two months was revised up by 30k, largely offsetting the disappointment in April payrolls relative to economist expectations.   There probably wasn’t much in the payrolls report to materially change the market’s impression that the US labour market remains tight, wage growth is trending gradually higher (but not to the point where inflation is a serious concern), and the Fed remains on course to continue hiking rates this year and next. 

The initial market reaction saw around a 2bp decline in US Treasury yields and a modest decline in the USD, but these moves were quickly reversed with the market focusing on the larger than expected fall in the unemployment rate, to 3.9%.  The unemployment rate is now within reach of the lows reached in the early 2000s of 3.8% and one has to go back to the late ‘60s to find a lower unemployment rate than that.  The 10 year Treasury yield ended the day unchanged at 2.95%, while the 2 year rate was up around 2bps.  

Several Fed officials were out speaking on Friday, with the broad message the Fed’s inflation target was “symmetric” and that they didn’t intend to overreact to a modest inflation overshoot.  Incoming New York Fed President John Williams said “I am personally comfortable with the fact that inflation may overshoot that 2 percent for a while.”  The market will expect a similar message from Fed Chair Powell when he speaks on Tuesday.   US core CPI released on Friday morning NZT is the highlight data-wise this week.

US-China trade tensions threaten to come back on the market’s radar this week, with media outlets reporting that the trade talks in China on Thursday and Friday ended deadlocked.   While both sides agreed to keep talking, the US delegation’s long (and in certain cases, unrealistic) set of demands doesn’t bode well for any near-term agreement.  The US reportedly asked China to reduce its bilateral trade surplus with the US by $200b by the end of 2020 (US administration officials had previously mentioned a figure of $100b; the US deficit with China stood at $337b at the end of 2017) and not to retaliate to any of the proposed measures.  The problem is that the US trade deficit vis-à-vis China is not just a function of trade policies but also relative macroeconomic conditions and ironically Trump’s fiscal plan is, if anything, likely to further boost the US deficit (via increased spending on imports and reduced US national saving).  The editorial in the official China Daily said “the developments over the past months show China will not compromise on its core interests no matter how desperately the U.S. tries.”  The market will hope this is just the opening salvo in negotiations and there was enough progress made to delay Trump’s proposed $150b tariffs on Chinese imports (which can be imposed after public comment closes on May 22nd).  The market will be keeping a close eye on the President’s twitter feed this week.

Finally, the Argentinean central bank raised rates on Friday to 40%, the third increase last week, to combat the weakness in the peso.  The Argentinean peso rose around 2.5% on Friday in response to the rate hike, but is down almost 15% this year.  The resurgence in the USD and increase in US real rates over the past month has put pressure on emerging market currencies, especially in those countries with high inflation and current account deficits, most notably the Argentinean peso, but also the Turkish Lira (-10% YTD).

So far, there has been limited fall-out in other risk-asset markets, and most emerging market currencies are much stronger than they were at the start of 2016 (when concerns about China were at a peak and commodity prices were in free-fall) but it’s certainly one to keep an eye on.


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