Originally published by Rivkin Securities
The US Dollar Index surged +0.51% on Friday while bond yields reversed initial declines despite a disappointing non-farm payroll figure. Month-on-month for March 89,000 jobs were added, almost half of the 170,000 forecast. Both January and February’s figures were also revised lower by 22,000 and 16,000 respectively taking the first quarter average to 178,000 per month. Part of the weakness is attributed to weather conditions during the measurements, however with such a low unemployment rate there is a dwindling supply of workers that can be added without a rise in the participation rate which remains steady at 63%. That figure is still well above the estimated 100,000 required to maintain full employment given population growth.
The unemployment rate dropped to the lowest level since 2007, decreasing from 4.7% to 4.5% and importantly the underemployment rate also declined to the lowest levels since 2007 fell to 8.9% from 9.2% previously. Average hourly earnings decreased slightly year-on-year down from 2.8% to 2.7% as forecast in line with the recent decrease in the Atlanta Fed’s Wage Growth tracker which is down from 3.9% in November 2016 to 3.2% in February.
The figures seemed to have no impact on the expectations for a June rate hike with the probability remaining around 67% for the June 14th meeting. Fed officials will also likely look through this weakness as they focus on the positive broader outlook as they remain on track for three rate hikes in 2017.
The dollar was supported by bond yields with both the 2-year and 10-year yields reversing initial declines to rise +4% and +3 basis points respectively. Spot gold closed higher, up +0.18% however well off the session highs after rising initially by +1.58%. US equities edged lower, with both the S&P 500 and Nasdaq 100 down -0.08% and -0.05% respectively.
Looking ahead this week the Q1 earnings season will kick off with analysts forecasting growth of around +10.1% to be driven by the energy and financial sectors. On the economic data front we’ll see UK, Chinese and US inflation data, US retail sales and Australian unemployment. It’s a quieter week for Fed speakers with speeches by Yellen, Bullard, Kashkari and Kaplan.
In Europe the euro dropped -0.54% while equity markets were generally higher with the Euro STOXX 600 rising +0.13%, as did the FTSE 100 and CAC 40, up +0.6% and +0.27% respectively while the DAX was flat, down just -0.05%. The spread between the French and German 10-year bond yields shown on the first chart below remains elevated but well off recent highs ahead of the first round of French Presidential elections on April 23rd. At this stage polling suggests a neck and neck race between Independent Emmanuel Macron and protectionist Marine Le Pen for the first round honours, before Macron wins the race in the second round with around 60% of votes. A win by Macron should see this spread lowered by around 25-30 basis points.
Locally the S&P/ASX 200 edged higher, up +0.11% and we can expect an extension of these gains this morning with ASX SPI200 futures up +14 points at the close of trade on Friday.
Data releases:
· Australian Home and Investing Loans (MoM Feb) 11:30am AEDT
· Fed’s Bullard Speaks In Australia 1:05pm AEDT
· Fed’s Yellen Speaks 6:00am AEDT
Chart 1 – French – German 10 Year Yield Spread
Source: Rivkin