90 seconds at 9 am: Real or rogue?

Weak US jobs report clouds Fed views; Swiss reject UBI, India debate inflation-fighting costs; UST 10yr yield 1.73%; oil up and gold jumps; NZ$1 = 69.3 US¢, TWI-5 = 72.7

7th Jun 16, 7:14am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news of a surprisingly weak American jobs report.

Markets were expecting job growth of +160,000 but they only got +38,000. They did get wages rising at +2.5% pa and a lower unemployment rate of 4.7%. But they also got a marginally lower participation rate which was unexpected.

Whether this is a 'rogue' survey or the real thing is hard to tell. But it was an unpleasant surprise. Equity and currency markets took it in their stride but bond markets did react. The open question is whether the US Fed thinks it is 'real' or 'rogue'; will it change its hike track? They will decide Thursday week.

Earlier today, Janet Yellen said that despite the "disappointing" jobs report, interest rate hikes are coming because "positive economic forces have outweighed the negative" for the United States and that risks from "abroad" earlier this year have "diminished". What the market does not know is whether all this means things have been pushed back, or are still on track for 2016.

In Switzerland, a major test of the universal basic income concept has fallen well short. It was put to a referendum there over the weekend and it lost 3:1, a resounding defeat.

In India, the reappointment of their central bank governor is a major issue. Some politicians have called for him to be replaced because he has raised the value of the Rupee as a way of containing rampant inflation. Others see his term as having done an "incredible job". If he is replaced, markets are unlikely to view the move positively.

In New York the benchmark UST 10yr yield fell sharply after the non-farm payrolls report and dropping -10 bps to 1.71%. Today it has bounced a little, currently at 1.73%. That shift will echo today in local wholesale interest rate swap markets today.

The oil price is little changed however with the US benchmark just over US$49/barrel and the Brent benchmark just over US$50/barrel.

The gold price surged +US$35 on the US jobs report, now at US$1,244/oz.

And finally, the NZ dollar will start today against the greenback at 69.3 US¢, it is at 94.1 AU¢, and at 61 euro cents. The TWI-5 index is now at 72.7.

If you want to catch up with all the local changes on Friday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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11 Comments

by Stephen Hulme | 7th Jun 16, 7:38am 1465241930

The open question is whether the US Fed thinks it is 'real' or 'rogue'; will it change its hike track?

And so once again, the Fed finds itself with egg on its face, hoisted by its own petard of forward guidance. As I’ve said numerous times over the last few years, forward guidance – what other kind of guidance is there by the way? – is only as good as the Fed’s forecasting ability. Which is, sad to say, not very good. Forward guidance has itself become the destabilizing force, a source of volatility rather than a dampener, creating uncertainty rather than providing the opposite. It is hard to believe markets would have had to adjust so sharply Friday if the members of the Fed had just been silent the last few weeks.

Building on Joe’s central point, they can’t be silent because their unhinged howling at the moon is all there is. With the Friday’s payroll report, even the unemployment rate takes on very different connotations. To which Chairman Yellen, unsurprisingly, replies today as if it never happened:

I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately. Read more

Revising history Mr Chaston ?
....currency markets took it in their stride

Hmmmm.
Currency markets went haywire, with the Japanese yen surging 2% versus the dollar. The U.S. dollar index ended Friday’s session down 1.75%, its biggest one-day decline since December. Read more

by David Chaston | 7th Jun 16, 8:31am 1465245078

It is a very long bow to call it 'haywire'. Just look at the charts above. Reactions seem modest to me ...

by Stephen Hulme | 7th Jun 16, 9:10am 1465247457

The USD index variation represents the annual return in the UST 10 year tenor.

The quoted Japanese Yen variation magnitudes more in the JGB 30 year tenor.

by Roger Witherspoon | 7th Jun 16, 4:02pm 1465272171

To a tidy academic mind, six months between rises must look very measured and orderly.

The Federal Reserve are saying "Look, we said we would be measured in our actions so as to allow time for countries with large US dollar debts to adjust. Instead of going for a rise every three months we are going for a rise every six months".

Central bankers regard credibility as vital to preserving their independence, prestige and salary. They will loose far too much credibility if they do not raise rates in June.

by sharetrader | 7th Jun 16, 8:31am 1465245060

I was picking one fed hike in September august, now I think it wont happen this year, all the data is showing the US as flat and growth slowing

by David Chaston | 7th Jun 16, 8:43am 1465245814

Don't jump off the ledge just yet. You need to remember the BLS report is a 'survey' using sampling. Occassionally it comes up with an odd result (consistent with all survey-type data). But it does survey the whole labour market, including the public sector.

The ADP data mimics the private sector. It is a huge database. And it is not a survey; it tracks actual data from 10,000s of employers. As such it is not subject to the occassional 'odd result'. And over the intermediate term it does mirror the non-farm survey very well (or is it the other way around?). It did not show this abrupt drop.

In the public sector, there was no event that indicated a sharp fall in hiring. In the private sector, there was a major strike that might have explained about 15% of the fall, not all of it by any means.

Wait for the next BLS survey. Odd results never happen consecutively so if June is low too, May is not rogue.

by iconoclast | 7th Jun 16, 9:12am 1465247577

The BLS employment survey changes its selected sample periodically .. sudden changes in results often occur at the time a new sample is selected .. the next survey should stabilise

by Stephen Hulme | 7th Jun 16, 9:24am 1465248288

Not a belief priced by the next door neighbour's sovereign bond trading community or any other for that matter.

Australia’s 10-year bond yield dropped to an all-time low after U.S. payrolls grew at the slowest pace in almost six years, slimming the chances the Federal Reserve will increase interest rates in the coming months.

Ten-year yields have fallen 56 basis points in the U.S. in 2016, while tumbling about 56 points in Germany, 40 in Japan and 72 in Australia. The Aussie benchmark closed at 2.16 percent. Read more

by iconoclast | 7th Jun 16, 9:32am 1465248767

It's simple mathematics and sampling distortions .. The Bureau of Labor stats do not pre-announce when they have changed the sample and ... so the behaviour of the markets is to play safe, act first and ask questions later ... they wouldn't know would they?

All I am saying is sudden changes in results can and do occur when changing samples

by Triple | 7th Jun 16, 9:51am 1465249887

"Whether this is a 'rogue' survey or the real thing is hard to tell. "

+245,000 US jobs in February, +208,000 in March, +123,000 in April and +38,000 in May.
Detect a pattern?

http://www.investing.com/economic-calendar/nonfarm-payrolls-227

by waymad | 7th Jun 16, 9:54am 1465250077

Worth looking at MoM's analysis of this data a few days ago...http://maxedoutmama.blogspot.co.nz/2016/06/i-told-you-so.html

We are in the first stages of a European-style business-led recession. It will be long and slow.