Non-farm payrolls showed the largest monthly gain in employment since mid-2016; the 10 year Treasury yield increased 3bps to 2.89%; commodity currencies were supported by bouyant risk appetite; NZD underperformed the rest of the commodity bloc

By Nick Smyth

Non-farm payrolls showed the largest monthly gain in employment since mid-2016, 313k, much higher than expected.  In contrast, US wage growth was lower than expected, with average hourly earnings falling to 2.6% YoY.  The unemployment rate was unchanged at 4.1% due to a large rise in the participation rate, while previous months’ employment gains were revised up. 

The combination of strong job gains (reflecting a strong economy) and some moderation in wage growth (assuaging recent inflation fears) caused US equities to move sharply higher.  The S&P500 was up 1.7% on the day and 3.5% on the week.  The Nasdaq moved to a new record high while the VIX fell below 15, its lowest level in a month. 

Earlier Friday, risk assets had been boosted a little by the surprise announcement that President Trump planned to meet North Korean leader Kim Jong Un (although tensions on the Korean peninsula have not been a major driver of markets for some time).  

US Treasury yields moved modestly higher in response to the payrolls report, with the headline jobs number overshadowing the weakness in wages.  The 10 year Treasury yield increased 3bps to 2.89%, although it remains stuck within a 2.80% - 2.95% range for now.  The market continues to price around 3 hikes in the US this year, in line with the median projection from the Fed’s ‘dot’ plot. 

After Chair Powell’s recent testimony, market participants have speculated that the Fed ‘dots’ could shift up, to indicate a fourth hike for 2018.  With payrolls not proving decisive either way, attention now turns to US CPI release on Wednesday morning, the last major piece of US economic data due before the Fed’s March meeting. 

In FX markets, buoyant risk appetite and a surge in oil prices boosted the commodity currencies (NOK, AUD and CAD).  Oil prices rose around 3% on Friday, reversing the falls over the previous two days.  The AUD may get a further boost this week after President Trump tweeted that Australia would receive an exemption from his proposed steel and aluminium tariffs. 

The US dollar was mixed after payrolls on Friday.  The EUR ended broadly unchanged around 1.23.  Meanwhile, the JPY fell,  in line with ‘risk-on’ moves in global markets. The BoJ kept their 10-year yield target at 0%, as expected. 

The NZD underperformed the rest of the commodity bloc, but was still up on the day against the USD.  The NZD rose from 0.7260 before payrolls to around 0.7285, supported by the increase in risk sentiment.  This week, the highlight for the local market is NZ GDP which is released on Thursday.  We are looking for a 0.7% increase for Q4, which would boost the annual rate to 3.1%.  The NZ current account deficit is released on Wednesday but should only have a fleeting market impact. 

There is no market-moving data in the session ahead, and the focus will probably be on continued headlines around the proposed US import tariffs, as other countries seek exemptions.  Besides US CPI on Wednesday morning, US retail sales are released the following day and ECB President Draghi speaks on Wednesday night. 

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