A mixed US non-farm payroll report, featuring a mere 20k job gain but faster wage growth, had little net impact on markets, with US equities and bond yields close to unchanged on the day. The USD was broadly lower on the day, although the bulk of those losses had occurred pre-payrolls. The NZD was the top-performing currency on Friday.
Friday’s US non-farm payrolls report was a mixed bag. Employment growth was much weaker than expected in February, coming in at only 20k. In contrast, average hourly earnings rose by more than expected to 3.4%, the fastest pace of wage growth since the GFC. The unemployment rate fell by 0.2% to 3.8% while the under-employment rate made a new-cycle low of 7.3%.
There were short-lived falls in US equities and bond yields in response to the lower headline jobs number, although these were reversed over the course of the trading day with the market appearing to discount the data. Of note, employment growth in February appeared to be affected by colder than usual weather during the survey week (as evident in a significant fall in construction jobs) and there was likely some payback from the prior month’s outsized 311k gain. The three month moving average for payrolls now stands at 186k, down on last year’s 220k average – this suggests some slowing in the US labour market this year, consistent with other US economic indicators, but still a reasonably firm level. Stronger US housing data, released at the same time as payrolls, reinforced the notion that the US economy is not falling off a cliff.
Global equity markets had been on the back-foot leading up to payrolls after very weak Chinese trade data had added to concerns about the slow-down in the Chinese economy. Chinese exports and imports fell sharply in February, although the timing of the Lunar New Year holiday appeared to heavily overstate the extent of the weakness. The Chinese CSI300 index fell 4.4% on the day, taking its year-to-date increase down to ‘only’ 22%. Adding to the downward pressure, Bloomberg reported that a sell recommendation on a state-owned insurer by analysts at China’s biggest state-owned brokerage, Citic, was widely interpreted as a sign the government wants the 2019 equity market rise to slow down. And on the trade front, the WSJ reported that the Trump-Xi meeting originally pencilled in for the end of March might be pushed back, with the two sides reportedly making progress but still dealing with some of the thornier issues like enforcement.
S&P500 futures were down around 0.5% in the lead-up to payrolls and extended those losses to more than 1% in the immediate aftermath of the data. But a strong recovery over the last few hours of trading, consistent with the market discounting the weaker jobs number, saw US equities end the day only slightly lower (S&P500 -0.2%). Likewise, the US 10 year Treasury yield was only 1bp lower, at 2.63%, with yields unable to sustain a move below the bottom of the recent trading range. A speech by Fed Chair Powell was not market-moving, although he noted on the Fed’s review of its inflation targeting framework that there is a “high bar” for any changes, including to an average inflation target which has been suggested as an option by several of his colleagues. Separately, Powell’s interview with 60 Minutes will be aired later this morning and may contain some more colour on the Fed’s policy outlook, although we would be surprised if he deviated from the recent mantra of “patience.”
The USD was down across the board (with the exception of the GBP), with most of that move occurring before payrolls. Payrolls itself had little more than a short-lived impact on the USD. The USD indices gave back around half of their post-ECB meeting gains on Friday (DXY -0.4%, BBDXY –0.3%), but they still remain near the top of their recent ranges.
The NZD was the best performing G10 currency on Friday, up 0.75% to 0.6805, despite the weaker Chinese data and cautious risk sentiment for most of the session. Friday’s moves brought the NZD back to flat on the week against the USD, and close to the middle of the 0.6650-0.6950 trading range that has been in place since November. The NZD/AUD moved up to 0.9655, its highest level (on a closing basis) since September 2016. Of note, our colleagues at NAB changed their RBA rate call on Friday, and now expect two 25bp rate cuts, at the July and November meetings.
Elsewhere in FX markets, the GBP was down 0.5%, the only currency to fall against the USD on the day. Negotiations with the EU have failed to generate a breakthrough on the Irish border, and Theresa May faces another likely heavy defeat in the House of Commons on Tuesday (the Sunday Times reported that it may exceed the record 230 vote defeat of her last Meaningful vote). The CAD was up 0.3%, supported by a strong Canadian employment report, which showed much larger job gains than expected (although the Bank of Canada’s recent dovish shift means it’s unlikely to influence the policy outlook).
Long-end NZ swap and bond rates experienced another heavy fall on Friday, with the 10 year swap rate down 4.5bps to an almost record-low of 2.3725%. Global developments were again the main driver, with the Australian 10 year rate declining by a similar magnitude. On the domestic data front, we nudged down our forecast for Q4 GDP to 0.5%, following manufacturing and building data on Friday.
In the week ahead, US retail sales is released tonight and expected to rebound from its large fall in December, while US CPI is released tomorrow. In China, the monthly activity figures are released on Thursday. As mentioned, the UK parliament will vote on Theresa May’s Brexit deal on Tuesday night and, assuming it fails, she has promised MPs a chance to vote over the following two days on whether the UK should leave without a deal (almost certain to fail) and on whether to extend Article 50 for a limited period (highly likely to pass).
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