The US employment report Friday night was significantly better than expected, setting the tone for markets, culminating in a strong rise in US and European equity markets and a chunky rise in global rates. The currency market was mixed, but with a fairly modest reaction to the report overall. Earlier gains in the NZD and AUD were sustained, while EUR and JPY were on the weaker side of the ledger.
The US employment report was another one for the history books, with the biggest miss ever relative to expectations – a surprise 2.5m gain in the number of non-farm payrolls in May against expectations for a 7.5m loss of jobs. Stronger employment growth meant that the unemployment rate slipped to “only” 13.3%, against expectations for a surge to 19.0%. Explaining the outcome, historically high jobless claims data gave a poor steer for the jobs report, given an offsetting rise in new hiring that the claims data don’t capture. On the unemployment rate, the BLS noted that it might be understated by 3 percentage points due to people classifying themselves as absent from work rather than unemployed on a temporary layoff. The wage data remained distorted by compositional effects of employment, with more lower-paid people in the hospitality industry re-gaining employment, leading to the 1% fall in average wages.
The data are consistent with activity indicators that show a recovery in activity as US lockdowns eased, following the big hole in the economy in April, and give increased confidence that activity is on a clear path upward from here as restrictions have eased further. Canada’s employment report was also a lot stronger than expected, lending weight to the view that the US result was no fluke and that a genuine turning point in economy has passed for North America. The faster than expected improvement in the labour market makes it less likely that temporary job losses become permanent, a positive factor for the outlook. Against that view, the much better than expected US labour market – albeit still dire – eases the pressure off the government to add much-needed further fiscal stimulus, and some Congress members have already suggested this.
The strong employment reports added more fuel to the global equity market recovery, seeing the S&P500 up 2.6% and the Euro Stoxx 600 index up 2.5%. The Nasdaq index made a fresh record high intra-day, although closed a few points below its February high, while the S&P500 now sits less than 6% below its record high. The rise in equities has become more broadly based over recent weeks, a positive sign for the bulls, alongside the outperformance of smaller cap stocks. The equally weighted S&P500 index was up by 9.6% for the week, compared to the 4.9% gain in the more widely quoted market-cap weighted version, the third week in a row that the equally-weighted index has outperformed.
The data got the market wondering how much more monetary policy support would ensue, leading to the rates market selling off. The US 10-year Treasury rate was up as much as 14bps at one stage to just under 0.96%, before buyers returned, seeing it close up “just” 7bps to 0.895%, marking the increase for the week at some 24bps. The sell-off was led by the long end, with the 2-year rate up just 1bp and taking the 2s10s spread to 69bps, a near 3-month high.
The NZD and AUD were already flying high ahead of the US employment report, the former blasting through 0.65 and the latter through 0.70, continuing their strong run with seemingly no limit to buyers’ enthusiasm evident all week. The employment report did little to knock the NZD off its perch, spending much of the night session hovering just above 0.65, while the AUD found the going a little tougher and edged lower to close the week around 0.6970. Gains for the week were in the order of 4½-5% for the currencies.
China has warned its citizens not to travel to Australia due to a significant increase in racist attacks since the coronavirus outbreak. This continues the diplomatic spat between the two countries, and remains a risk factor worth monitoring, although this hasn’t dented support for the AUD yet. The latest warning will have no impact for now, given the closed border, but China is the number one source of foreign tourists and foreign students.
Despite higher US rates and spreads to other G7 markets, the USD tracked largely sideways, with strength in CAD and GBP offset by weakness in EUR and JPY. EUR was on the back foot after weaker than expected Germany factory orders data, while its pullback to sub 1.13 followed strength earlier in the week. GBP didn’t seem harmed by the lack of progress on a UK-EU trade deal. EU chief negotiator Barnier said “The truth is that there was no substantial progress…we can only take note that there has been no substantial progress since the beginning of these negotiations, and that we cannot continue like this forever.”
Oil prices were up nearly 6%, with Brent Crude up through USD42 and WTI up through USD39.50, with speculation that production cuts would be extended. In the event, this was confirmed in a meeting on Saturday, with OPEC+ agreeing to renew production limits at a similar level to that prevailing instead of tapering them as previously agreed.
Data over the weekend saw China’s trade surplus rise to a record USD63b in May, with a smaller than expected fall in exports and a larger fall in imports, the latter accentuated by the earlier plunge in crude oil prices. Thus, import volumes were on a better footing, consistent with improved domestic demand.
The NZ rates market saw further upward pressure and a steepening bias, up in the order of 5bps at the long end of the curve, a reflection of global trends which should extend into today’s session. The RBNZ announced it would keep the pace of its bond buying unchanged for this week, at $1.075b in government bonds ($1b in nominal bonds), still roughly matching the amount of weekly issuance from NZ Debt Management.
The day ahead looks quiet but we expect PM Ardern to announce a move to alert level 1 to come effect later this week, which will remove all restrictions apart from inbound tourism, further supporting NZ’s economic recovery.
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