Friday’s US non-farm payrolls report saw US 10-year yields post a new one-year high before slipping back from their peaks, but still closing higher on the day.
All in all, there was little to find wrong with Friday’s report. The headline number was a huge beat at 379,000, while the upward revision in January to 166,000 was also very welcome, and the unemployment rate declined to 6.2%. The rebound in the US labour market since the negative number in December appears to suggest that the slowdown then was just a blip, and when you dig a little deeper into Friday’s report, there is plenty of optimism that the current rebound in hiring could continue into March. This is because the bulk of the rebound in February was driven by the leisure and hospitality sector, as businesses started to reopen, with a gain of 355,000. As the weather warms up and the vaccination programme gets rolled out, there is plenty of scope for further gains in the coming months. The construction sector acted as a drag, as numbers declined by 61,000 due to the cold snap across the midwest, however this is likely to be temporary, and with the US economy still over 9m jobs down from this time last year, there appears to be plenty of slack left to pick up.
With the Senate also approving the latest $1.9trn stimulus programme, the gateway to a successful ratification in Congress and presidential approval later this week paves the way for an enormous fiscal boost starting from Q2, and over the rest of the year. The lack of market reaction to this suggests that for the most part this is already priced in. The most striking part of the package is a means-tested direct payment to most US individuals worth $1,400 per person, along with much more generous unemployment provisions.
While all of this is welcome news for the prospects for a strong economic rebound, it also raises questions about how much further US long-term yields can go, in terms of their current move higher. One thing seems certain, long-term yields look set to continue to rise, with the 1.8% level on the US 10-year yield the next target, though we could see a pullback to 1.4% first. US equity markets, despite a big turnaround on Friday, finishing the day higher, but ended lower for the third week in succession, raising some important questions as to whether we’ve seen a short-term peak, along with the prospect of further downside.
The US Federal Reserve certainly doesn’t appear to be expressing any undue concern at the current moves in US bond markets, and why should they, given US 2-year yields remain stubbornly well anchored. The biggest concern appears to be around inflationary pressures, which have shown signs of accelerating quite sharply, with Brent crude prices closing the week back above $70 a barrel, its highest level in 13 months, and prices paid data at multi-year highs. Oil prices are also higher after the weekend events that saw one of Saudi Arabia’s key oil facilities come under missile and drone attack from hostile forces in Yemen, though there doesn’t appear to have been any damage inflicted on any production infrastructure.
As we look ahead to the next few days, it’s been notable that despite the falls in US markets over the last three weeks, European markets have held up fairly well, with the DAX hitting a record high last week, and UK markets also doing well in the aftermath of last week's Budget. This upbeat tone looks set to continue this week with a positive open expected, even though Asia markets have experienced a somewhat more mixed start, despite some fairly decent China trade data for January and February, which showed a big rebound in exports as global demand continues to show resilience. Exports surged over 60% from a year ago, and while you can argue that the number is flattered due to the China lockdown a year ago, which shut factories down, the direction of travel still looks impressive. Imports also beat expectations, rising over 22%, in a sign that domestic demand is also recovering, which should bode well for the upcoming retail sales numbers which are due in a week’s time.
The main focus this week is set to be on the latest meeting of the European Central Bank, and while central bank officials will welcome the recent fall in the value of the euro, what they won’t welcome is the rise in borrowing costs that has come about as a result of the recent surge higher in global bond yields. This has prompted a concern about a tightening of financial conditions, which the weaker members of the EU can ill afford. The rise in the US dollar and higher yields could also have consequences for some emerging market countries as well given that some of their liabilities are sensitive to US interest rate fluctuations.
What is also troubling some overseas investors is the nature of the EU’s vaccination programme, which is well behind its peers, and as such has prompted a net outflow from various European equity funds for three weeks in a row, over concerns that any economic recovery will come too late to rescue the summer season for the likes of the weaker members of the union. Losing another summer tourist season is now a real risk for Italy, Spain and Greece, and could see even more vulnerable businesses founder on the back of the pandemic.
The only data of note today is the latest German industrial production numbers for January, which are expected to show a decline of 0.4%.
EUR/USD – continued US dollar strength has the potential to see further losses towards 1.1870 and the 200-day MA at 1.1805. Only a move back above the 1.1970 area diminishes this risk and argues 1.2050.
GBP/USD – continues to drift lower with the risk we could see a move back to the 1.3750 area and break out point for the move higher. While above here and the 50-day MA the bias remains for a move back above 1.4030 and a retest of the highs. Below 1.3720 undermines this scenario.
EUR/GBP – the 0.8540 area remains a key support, with the bias remaining for a move lower towards 0.8400. Any rebound needs to overcome the 0.8730 to delay this outcome with any squeeze likely to find 0.8800 a huge obstacle.
USD/JPY – the uptrend remains intact for a move towards 110.00 with the 109.70 area likely to be a key resistance. At current levels we do remain susceptible to a pullback towards the 107.30 area in the interim. The current uptrend from the January lows lies all the way back at the 200-day MA and 105.60 area.