Stronger than expected US jobs data while average hourly earnings inflation on a weaker trajectory, consistent with no evidence of wage-price spiral or sense of a "real" US economic recession ... yet. Global rates push higher on the data

Strong US jobs data drove global bond rates higher on Friday night but other market moves were modest. Higher risk appetite saw commodity currencies outperform, with the NZD closing the week just under 0.62, ending an uneventful week for the currency. EUR tumbled towards parity before reversing course and ending the week just under 1.02.

US non-farm payrolls grew a strong 372k in June and even accounting for a net -74k of revisions over the past two months, the data were stronger than expected. The unemployment rate was steady at 3.6%, as expected, and average hourly earnings growth of 0.3% m/m was also in line.  The wages data continue to point to a deceleration of wage inflation over recent months, reducing fears of an imminent wage-price spiral. Strong employment growth is also inconsistent with the notion that the US economy is already in recession, suggesting that even if Q2 GDP comes in negative then the “recession” would only be technical in nature.  Still, as policy tightens further and actually heads into restrictive territory, then that is when the real chance of recession emerges.

Atlanta Fed President Bostic, not a voter this year, spoke after the employment report and said he backed a second 75bps hike later this month because of the “tremendous momentum in the economy”, clearly not giving much credence to the significance of two possible consecutive negative GDP quarters. NY Fed President Williams didn’t push back on another super-sized 75bps hike and told reporters after a speech that “it seems pretty clear to me” of needing to get the Fed Fund rates to “something like 3-3½% by the end of the year”. 

The market backs these views and added to the chance of a 75bps hike this month after the employment report, making it close to fully priced, while the Fed Funds rate for the end of the year is priced just under 3.5%. US Treasury rates rose across the curve showing a sustained move higher after the data were released.  The 2-year rate closed the day 9bps higher at 3.10% and the 10-year rate was also 9bps higher at 3.08%, keeping the 2s10s curve slightly negative. Higher US rates spilled over into other markets, with UK and European 10-year rates moving higher to close the week.

Canada’s jobs data were weaker than expected, with over 43k less jobs in June, but that didn’t prevent the unemployment rate dropping to a fresh multi-decade low of 4.9%, due to nearly 100k workers dropping out of the labour force. The tight labour market saw average hourly wages shoot up to 5.2% y/y adding to the chance of the BoC tightening policy with a super-sized 75bps hike this week.

US equities closed the week on a flat note, but still managed a near-2% rise for the week overall, with the Nasdaq’s weekly gain closer to 4½%. With the US 10-year rate up 20bps for the week, this looks like a case of bargain hunters driving the equity market’s recovery, a change from fears of recession and tighter policy gripping the market.

Despite the flat S&P close on Friday, the VIX index closed at its lowest level in a month, at below 25 and, alongside lower credit spreads our risk appetite index was 2pts higher at 29%. Higher risk appetite was evident in currency markets, with commodity currencies outperforming Friday night. The AUD was the best of the bunch, closing the week around 0.6860, while the NZD closed around 0.6190, capping off a fairly uneventful week for the NZD overall.  While the NZD did print a fresh 2-year low of 0.6125 earlier in the week, it was a fairly flat weekly performance around 0.62.

The EUR capped off a poor week with a small net lift on Friday to 1.0185, recovering into the close after tumbling to a fresh 20-year low of 1.0072 as European markets were opening. Not helping sentiment is a view that the ECB will lag the Fed on rate increases ahead, while the EU faces an economy-sapping energy crisis, with already evidence of electricity rationing in Germany. Things can only get worse as winter approaches so a break of parity is now becoming a consensus call, the question now being how much below and for how long? NZD/EUR was flat on the day, but closed the week over 2% higher around 0.6080.

The shock assassination of Japan’s ex-PM Abe resulted in a temporary flight to the safety of the yen, seeing USD/JPY drop to a low of 135.33 on Friday afternoon, but ending the week just above 136.

The domestic rates market had a quiet end to a busy and volatile week. The swaps and NZGB curves both had a mild flattening bias, with 2-year rates up around 3bps and 10-year rates little changed. Volatility is likely to remain high this week with the RBNZ MPR and key US CPI release as possible market moving events. Anything other than a 50bps hike by the RBNZ on Wednesday would be a shock to the market. The global theme since mid-June has been a paring back of rate hike expectations, with the market pricing a peak in the OCR around 3.9%, now closely in line with the RBNZ’s May projection.

While it will be a busy week ahead, the data calendar starts off light, with only NZ electronic card transactions data to digest in the day ahead, which will help inform whether very low levels of consumer confidence are reflected in spending. As well as the RBNZ’s MPR and US CPI, China activity data for June – including evidence of likely economic contraction in Q2 – Australian employment, and an expected 75bps hike from the Bank of Canada are all on the agenda. The US earnings session also kicks off this week. The US equity market and, relevant for the NZD, risk appetite will be vulnerable to any reported hit to earnings from surging inflation or weaker outlook statements.