TradeTheNews.com 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.
Salesforce.com 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.
