Friday, June 3, 2016

Jobs Data Flop Delays Fed Hike; ECB and OPEC Stand Pat Weekly Market Update: Jobs Data Flop Delays Fed Hike; ECB and OPEC Stand Pat
Fri, 03 Jun 2016 16:06 PM EST

Trading volumes were a bit light this week after the Memorial Day holiday weekend in the US, although markets did not lack for dramatic headlines. The ECB confirmed its corporate bond buying program will start next week. OPEC was unable to agree on any formal production quotas, but members showed they might be more cooperative in the future. In Japan, after months of prevarication, Prime Minister Abe confirmed he would delay a sales tax increase for 30 months. On Friday, the US May jobs report widely missed even the lowest estimates as non-farm payrolls came close to a six-year low and the prior two months were revised lower. After the very poor jobs numbers, Fed fund futures heavily discounted the chances of a rate hike in June and July. The dollar saw its steepest one-day plunge is six months while gold shot up 2.5%. Interest rates fell globally and the US Treasury curve held near some of the flattest levels seen since 2008. Bank stocks finished the week under modest pressure, giving back a portion of the gains seen after the hawkish April FOMC minutes. Nevertheless most major US indices remain within striking distance of all-time highs. For the week the DJIA slipped 0.4%, the S&P500 was flat, and the Nasdaq edged up 0.2%.

The May non-farm payrolls sank to 38K from 123K in April, widely missing expectations for a +160K advance. The unemployment rate dropped to 4.7%, the lowest since November 2007, as Americans left the labor force. The number of jobs added in April was also revised downward to 123K from 160K. The report indicated a broad hiring slowdown, including payroll declines in construction, manufacturing and mining. There was one bright spot in the report: average hourly earnings rose by 0.2% after a 0.4% gain in April. In the wake of the report, Goldman Sachs' Chief Economist Jan Hatzius said there was no chance for a Fed rate hike in June and only a 40% chance for a July hike. Fed fund futures rapidly repriced after the report, with traders seeing only a 4% chance of a June rate increase, down from a 25% probability earlier. The greenback had its biggest one-day decline in six months, as the dollar index dropped back toward 94 from 95.5. The EUR/USD spiked to 1.3500 from 1.1150, and the USD/JPY saw an over 2% move. Many emerging market currencies saw even larger gains against the dollar.

Fed Governor Brainard commented that the jobs report was disappointing and puzzling. She concluded that it would be advantageous to wait for more data before raising rates, saying the risk of waiting is less than the risk of raising rates prematurely. She also worried that an affirmative Brexit vote could cause a significant adverse reaction in the markets. Fed Chair Yellen will likely raise the same concerns in a speech coming up on Monday.

In other key US economic data, the April PCE inflation report was subdued, with no discernable pick-up seen in the Fed's key gauge of US inflation levels. The May Chicago PMI report and the Dallas Fed factory index both came in much more negative than expected, echoing the weak regional May manufacturing data seen over recent weeks. The ISM manufacturing index for May was a bit better than expected at 51.3, and looked much better than the various regional Fed factory production indexes. The new orders component held steady at a solid level of 55.7, while the production index slipped less than two points to 52.6.

On Wednesday, Japanese PM Abe set aside the third arrow of Abenomics and delayed the sales tax increase by 2.5 years, moving fiscal reforms to the back burner due to growing signs of weakness in the economy. The decision may help Abe cope with the expected decline in Q2 GDP and win votes at an upper house election on July 10, however doubts continue growing about Japan's huge public debt and ballooning social welfare costs. Moody's called the move a credit negative, while S&P said it does not believe the delay signals a lessening commitment to fiscal reform and would not have an impact on Japan's sovereign rating. Expectations of more Bank of Japan stimulus are running higher than ever, although some fear the BOJ will refuse to step in and save the government from its own mistakes. The BOJ's Sato, who voted against the January decision to adopt negative rate policy, commented after the tax delay that he was firmly opposed to cutting rates further into negative territory. The yen tightened quickly after Abe's decision, dropping back into the 108 handle, and then broke below 107 in the wake of the US jobs report on Friday.

Ahead of the US jobs report, GBP/USD had seen its biggest weekly decline since March as sentiment shifted against the view the UK would vote to remain in the European Union. Last week, the stay camp was looking much stronger in polling, but on Tuesday an ICM poll shifted in favor of "leave": 45% of telephone respondents and 47% of online respondents were in favor of leave, compared to 42% and 44%, respectively, in favor of stay. The bookmakers are stymied by Brexit: William Hill set odd for a "leave" vote at 11/4 (versus 6/1 a week ago), while Ladbrokes had the odds of "stay" at 11/4 as well (versus 7/2 earlier). Volatility in pound trading rose to its highest level in seven years: GBP/USD moved back toward 1.4400 from the 1.4700 handle through the first four days of the week. After the US jobs report, the pair retraced about half of that, returning to 1.4550.

There were no surprises in Thursday's ECB policy decision as the bank remains in wait-and-see mode. The two salient developments were disclosure of the timing of the corporate bond buying program and the absence of staff revisions to the inflation outlook. Draghi confirmed corporate bond purchases would begin next week under the stimulus program announced in March. Staff inflation projections were not revised higher at the far end of the policy outlook (2017-18), disappointing expectations for a slight upward revision. The euro strengthened modestly through the week heading into the decision, with EUR/USD retesting the mid 1.1220 area seen earlier in May, but gave up gains later on Thursday. Friday's post-US payrolls action saw EUR/USD spike rapidly back to levels last seen in mid-May, with the pair hitting 1.1350.

China May PMIs were mixed: the official non-manufacturing index slid to a three-month low and the manufacturing survey narrowly beat estimates to stay in expansion for the third straight month. In the manufacturing index, new orders hit a three-month low, inventories rose to a seven-month high, and employment rose to a one-year high. The Caixin manufacturing PMI surveying small companies was a less upbeat and fell into contraction. In Hong Kong, the May composite PMI contracted for 15th straight month, although the contraction narrowed somewhat. A Caixin economist warned that China's economy has not been able to sustain the recovery seen in the first quarter and called for Beijing to implement more fiscal policy measures to counter the economic slowdown.

OPEC failed to agree on a new production ceiling at its semi-annual meeting in Vienna. Nigerian candidate Mohammed Barkindo was chosen to be OPEC's new secretary general. Heading into the confab, Persian Gulf member states Saudi Arabia, Kuwait, and Qatar were leaning towards reinstating the OPEC output ceiling, while others such as Iran, Venezuela, and Algeria were insisting an output ceiling must be accompanied by a country-specific quota system. Members could not reach agreement on a renewed ceiling, but they took great efforts to appear more collegial than in the past, and generally expressed satisfaction that oil prices are on the rebound. There were signs that higher oil prices have enticed US frackers to restart some shuttered production: Friday's Baker Hughes data showed the first increase in the oil rig count in eleven weeks, and the largest weekly rise since December. Both Brent and WTI continued to trade this week within the $48-50 range seen since mid-May.

Australia reported first quarter GDP of +3.1%, the biggest rise in nearly four years thanks to particularly strong trade components. The rebound in commodities was a big driver, with exports contributing a full percentage point to the much stronger figure. Other aspects of the Australian economy were looking less good, with fixed capital formation falling 2.2% due to soft construction, and the separate AiG May manufacturing report still in expansion territory but still dropping to a seven-month low. reached a $2.8 billion deal to acquire Demandware, a cloud-based provider of e-commerce services to businesses big and small. Salesforce made its name with cloud-based software to help salespeople manage their leads and close deals, but the company took a big step into the business of sales itself. The $75/share cash offer for Demandware was a big premium on the company's current valuation. In other deal news, Great Plains Energy agreed to acquire utility Westar Energy for $60/share in cash, in a total deal valued around $12 billion. Jazz Pharmaceuticals agreed to buy Celator in a $1.5 billion deal.