US jobless claims show a notable lift; Challenger job layoffs surge even higher. The softer US labour market data drive US Treasury yields lower; 2-year rate back below 5%, 10-year rate below 4%

Newsflow has been light but weaker US labour market data helped drag US Treasury yields lower, with the 2-year rate back below 5% and the 10-year year below 4%.  The data helped sustain earlier weakness in the USD. The NZD has pushed up to 0.6130. The BoJ will be in focus today for Governor Kuroda’s final meeting with an outside chance of a surprise policy move. Apart from that risk, trading conditions are likely to be quiet ahead of the key US employment report tonight.

US initial jobless claims jumped 21k to 211k last week, well above expectations, to the highest level this year, while continuing claims rose to a 15-month high. Bad weather likely inflated the figures, just as the seasonally warm winter likely deflated them over the past couple of months. Challenger job layoffs, a leading indicator of job less claims, surged further with the combined January/February reading at its highest level since 2009 of 181k. As severance pay for those losing jobs runs out, initial jobless claims can be expected to rise significantly. 

The data provided some hope that the labour market was moving in the right direction to ease wages inflation and, after the sharp lift in short-term rates this week, some reversal was in play. The 2-year Treasury yield is down 10bps to 4.96%, while the 10-year rate is down 4bps to 3.95% - the rally in the bond market restrained ahead of the more important non-farm payrolls figure and other key labour market data tonight.

The USD was already seeing some downward pressure from the NZ close and the weaker US labour market data helped sustain the move. GBP has been the strongest performer, up 0.7% overnight to 1.1920.  The lower US Treasury yields backdrop has also supported the yen, USD/JPY down to 136.25. The NZD recovered to as high as 0.6150 and currently sits near 0.6130.  The AUD is back over the 0.66 mark.

Equity markets show small movements, with the S&P500 hovering in and out of positive territory and currently flat.

Yesterday, China inflation data suggested that the country wasn’t a current source of global inflationary pressure, with the CPI inflation dropping to just 1.0% y/y and the PPI remaining in deflationary territory at minus 1.4% y/y.

The domestic rates market showed a bias to flatten, with the swap 10-year rate down 8bps to 4.67% and the 2-year rate down 4bps off its 15-year high to 5.50%.  NZGBs showed a similar move, with some outperformance on a cross market basis, with smaller rate declines seen in Australia.  NZ electronic card spending data remain too volatile to give any clear signals and the market rightly ignored the 1.7% m/m fall in February, following the 3.4% lift in January. Attempting to look through the noise, the data doesn’t get in the way of the narrative that suggests sluggish retail spending in Q1.

In the day ahead, NZ manufacturing PMI data are released as well as activity indicators for Q4 that will help us finalise our GDP estimate in data due next week. 

The BoJ meets today and Governor Kuroda will be chairing his last meeting before he steps down. The current policy stance makes no sense to us, with the Bank buying JGBs at an unsustainable pace to keep the 10-year JGB from pushing above 0.5%, while core inflation has been surging above the 3% mark. The consensus sees no change in policy, but there is the tail risk of Kuroda surprising the market before he hands over the reins. An extension of the allowable trading range for the 10-year rate or a shift to a shorter maturity target would likely put upward pressure on global rates and trigger a surge in the yen. USD/JPY 1-week risk reversals show a sharp skew – the greatest since the depths of COVID – so the options market reflects the chance of a big yen move.

The key data release tonight is the US employment report.  Any notable deviation from the consensus in either direction would likely trigger a big swing in bonds, equities and currency markets. Non-farm payrolls are expected to rise by 225k, with average hourly earnings steady at 0.3% m/m and the unemployment rate steady at 3.4%.  Elsewhere Canada’s employment report and UK monthly activity indicators are released.