S&P500 ended the week within touching distance of its all-time highs, while bond yields fell modestly; currency moves were contained, although the NZD was the worst performer on Friday

By Nick Smyth

A market-friendly payrolls report, which showed a larger than expected jobs gain and softer wage growth, positive comments on US-China trade talks, and President Trump’s call for the Fed to resume QE all helped boost risk assets on Friday.  The S&P500 ended the week within touching distance of its all-time highs, while bond yields fell modestly.  Currency moves were contained, although the NZD was the worst performer on Friday.   The GBP wasn’t far behind, after Theresa May asked for a short extension to Brexit from the EU and negotiations with the Labour party failed to generate a breakthrough. 

It was another good session for equity markets on Friday, with the S&P500 increasing 0.5%, bringing its gain on the week to over 2%.  The S&P500 is now within 1.5% of its all-time record high reached in September last year. 

The non-farm payrolls report had a ‘goldilocks’ look to it, with the US economy adding a larger than expected 196k new jobs in March, while average hourly earnings increased only 0.1% (less than the 0.3% consensus).  After the shockingly low jobs gain last month (now reported as +33k), the March payrolls report should ease market fears of an imminent US economic downturn.  The three month moving average payrolls gain now sits at 180k, down from the 223k average in 2018, but still well in excess of the level needed to push the unemployment rate lower over time.  The lower than expected wages gain in March pushed the year-on-year rate down to 3.2%, adding to the market perception that inflation is contained and the Federal Reserve won’t need to raise rates again this cycle.  Looking through the month-to-month volatility in wages, the trend in wages still looks firmly higher, although as yet there hasn’t been a major impact on consumer price inflation. 

Equity markets were already trading positively before the payrolls report after Xinhua reported that a new consensus had been reached on a text for a possible trade agreement, while President Xi called for an early conclusion of negotiations.  Trump meanwhile said it could be another four weeks until a trade deal is finalised.  While both the US and China have cautioned that there are still a few major issues to overcome, the general message appears to be that the two sides are making progress in the negotiations and a deal is possible by May.  Adding to the positive sentiment, German industrial production rose by more than expected in February, with the previous month revised higher as well. 

US Treasury yields ended Friday modestly lower, with the bond market putting more weight on the lower than expected wages data from the payrolls report.  The 10 year Treasury yield ended the week at 2.495%, having traded as high as 2.54% before payrolls.  Comments from Trump about an hour and a half after payrolls, in which he said the Fed should cut rates and resume QE (in order to propel the US economy “like a rocket ship”), may have added some downward pressure to US rates later in the session.  While the Fed is an independent institution, Trump’s constant criticism of the central bank and his decision to nominate two political supporters to the Fed Board has likely added to the perception that the Fed is not going to raise rates again in a hurry.  The market prices around a 70% chance of a rate cut by year-end. 

The USD increased modestly after the payrolls report, although currency moves were relatively contained.  The USD indices were up around 0.1% on the day and sitting towards the upper-end of recent trading ranges.  

The NZD was the worst performing G10 currency on Friday, despite the more positive comments on US-China trade negotiations and broader improvement in risk sentiment.  The NZD fell 0.35% on Friday, breaking below the 200 day moving average in the process, and closed the week at 0.6730.  The RBNZ’s decision to move to an explicit easing bias at its March OCR Review has caused a recalibration of interest rate expectations, and weighed on the NZD, but for now it remains within its broader trading ranges.  The NZD/AUD cross continued to drift lower and ended down 0.2% to 0.9475, its lowest level since mid-January. 

Just behind the NZD at the bottom of the currency leader board on Friday was the GBP, which fell 0.3% to 1.3040.  Theresa May requested a short extension to Brexit from the EU, to June 30th, something the EU has previously turned down.  Meanwhile, talks between Jeremy Corbyn and Theresa May haven’t yielded a break-through, with Labour accusing May of failing to offer any concessions on her red lines.  A crunch week looms for the GBP and Brexit.  Ahead of the 12th April leave date, May will attend an EU Summit on Wednesday hoping to secure an extension to Brexit.  Negotiations between Corbyn and May will continue, with the Sunday Times reporting that May is willing to make some concessions on joining a customs union and was willing to write this into law (thereby making it difficult for her successor to undo).  If no solution in the negotiations can be found, May has promised that MPs will get to vote on a range of Brexit options, with the government apparently willing to abide by parliament’s decision, although time is short before the EU Summit on Wednesday. 

In the domestic rates market, the yield curve reversed some of its sharp steepening from Thursday’s trading session.  The 2 year swap rate rose 1.5bps on Friday to 1.65% amidst some profit-taking on received positions at the front-end of the curve, while the 10 year swap rate fell 0.5bps. 

Beside Brexit negotiations, there is plenty to focus on this week.  US CPI and the FOMC minutes are released on Wednesday night, while influential Fed Vice Chair Clarida speaks on Wednesday and Thursday. The ECB meeting is on Wednesday night amidst reports that President Draghi wants to extend the ECB’s forward guidance (it currently states that rates will remain at their present levels “at least through the end of 2019”).  Finally, US Q1 earnings season starts later this week, with Wells Fargo and JP Morgan reporting.  Earnings expectations have been slashed over recent months, such that the S&P500 is expected to report a 4.2% decline in earnings in Q1 according to Factset (although actual earnings have consistently exceeded analyst expectations over the last three years). 

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