US unemployment rate falls to 50-year low. Supports risk assets, although modest reaction for US rates, currencies. NZ rates fall to fresh record lows

After an eventful week, Friday’s focus on the US employment report was an anti-climax, with a mixed report seeing only modest reaction to currencies and US rates. But with fears of another bad economic report allayed, US equities recovered strongly to unwind most of the loss seen earlier in the week.

There was something for everyone in Friday night’s US employment report, with most happy to look on the bright side, following the shockingly weak ISM manufacturing and non-manufacturing reports earlier in the week.  The 136k rise in non-farm payrolls for September was slightly softer than the market consensus, although probably stronger than some feared and with positive revisions (+45k) for July/August adding to the positive vibe. Also of note was the fall in the unemployment rate to a 50-year low of 3.5% – so while employment growth is clearly on a weakening trend, it has still been strong enough to see a lower unemployment rate.  Surprisingly flat wages saw annual wage inflation fall to 2.9%, the weakest reading since mid-2018, casting more doubt about the inflation outlook.

Rather than jump on the weak wage inflation reading, the market was prepared to accept that compositional effects might have caused the errant figure and seemed to put more weight on the evidently tighter labour market.  This saw the market price a slightly reduced chance of a late-October rate cut, although still around 70% depending on how one calculates this. The US 2-year Treasury rate rose by as much as 4bps to a high of 1.43% after the release but closed up just 1bp at 1.40%. The 10-year rate closed down by less than 1bp to 1.53%, a muted response considering the big fall earlier in the week that saw it down by 15bps for the week.

With a stronger employment report than feared, the S&P500 rebounded by 1.4%, recovering most of less seen earlier in the week, taking its weekly loss to just 0.3%.

Fed Chair Powell’s short speech, due to be delivered after the employment report, was widely anticipated but came across as a non-event, with him simply reiterating the “economy is in a good place but faces some risks” story. Fed President’s Rosenberg and Mester also spoke after the employment report but weren’t willing to give guidance on their policy views, both wanting to look at the incoming data before the late-October meeting.

Currency markets didn’t react significantly to the US employment report. Improved risk appetite saw the AUD one of the better performers on the day, finishing +0.4% to 0.6770. There was little market reaction to the modest 0.4% lift in August retail sales, with the market still left wondering what happened to the tax refunds that began flowing in early July.  A key takeout from the RBA’s Financial Stability Review was the Bank seeing risks relating to the housing market having “receded somewhat” over the past six months, given the uptick in housing market activity. The RBA called on banks to be “not overly cautious in the implementation of current lending policies”, a nod perhaps to some further easing up on APRA/ASIC’s interpretation of lending standards.

The NZD was up around 0.3% to 0.6320, with the gain coming during local trading hours. CFTC data showed yet another record net short number of contracts (42k), equivalent to a notational USD2.7b, around the time the NZD had made a fresh 4-year low just above 0.62, following the weak ANZ and QSBO business surveys earlier in the week.  The more than one cent lift later in the week might have reflected some covering of short positions.

EUR was flat around 1.0980 and GBP was flat around 1.2330. The fog of Brexit continued to hang over the market. Boris Johnson’s lawyers promised a Scottish court that the PM will obey a law that forces him to postpone Brexit if he can’t reach a deal before 31 October. But Johnson later tweeted “New deal or no deal – but no delay. #GetBrexitDone #LeaveOct31”.  Sigh. Enough said.

On Friday, a downside bias prevailed for NZ rates, a reflection of global and local forces.  These included US recession fears post ISM manufacturing and non-manufacturing data, the “dovish” RBA cut, and awful NZ business confidence and activity readings all fresh in the minds of traders and investors, conspiring to add weight to the view that the RBNZ had a lot more easing to do. NZ swap rates fell 1-3bps across the curve to fresh record lows, while the NZ 10-year government bond rate fell by 3bps to 1.00%. Market pricing of the terminal OCR is just below 0.5%, close to our central forecast of 0.5%.

The calendar in the week ahead is fairly light, including over the coming 24 hours, with fresh trade talks between the US and China this week likely to be the focus of market attention.