By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Markets did little to write home about yesterday, besides a bid into long-end Treasuries, and notable demand for the JPY, as focus turns to the latest US labour market report today.
WHERE WE STAND – I spent a fair chunk of yesterday pondering whether someone, somewhere, had forgotten to turn markets on for the day.
To be very clear, I’m not complaining about that; far from it, in fact, as after the ridiculously choppy nature of trade in recent weeks, and with January’s US jobs report and CPI print still to digest this week, a ‘bit of a pause’ for breath was rather nice.
In terms of catalysts, the December US retail sales report was the only notable datapoint on Tuesday. The figures were, frankly, subpar, with headline sales having stagnated in the final month of last year, and with the control group metric – which broadly represents the consumption basket used to calculate GDP – seeing sales fall by 0.1% MoM. I’ll be keen to see whether this weakness was a one-off, or whether consumer spending may indeed be starting to stall, in the release of the January sales report next week, and am for the time being reluctant to draw too many conclusions from a single report.
‘Mr Market’ seemed to think along similar lines, with most assets largely unreactive to the data, besides a notable bid coming in at the long-end of the Treasury curve. That demand took benchmark 10-year yields below 4.20% for the first time in almost a month, and benchmark 30-year yields below recent tights at 4.80%. Naturally, the key litmus test will be whether we can remain below those levels post-payrolls today, with the bulls likely to gain an element of near-term control if we can.
Besides those gains in Treasuries, the only other notable move yesterday came in the JPY, which rallied another big figure or so, as a ‘buy Japan’ theme continues to dominate, with both JGBs and Japanese equities having also firmed notably since the weekend’s election. All this seems to be built in part on the idea that a more stable political environment is now in place, and in part on a belief that PM Takaichi will adopt some degree of fiscal discipline moving forwards. I’m not especially sure the latter holds water, given that what we’ve heard on that front thus far is simply rhetoric, not action. I’d, hence, wager that further gains for the JPY could well prove limited from here, at least not beyond the 152 lows in USD/JPY that we printed a fortnight or so ago.
Other than that, there’s little worth writing home about in terms of yesterday’s trade, unless a modest late-day wobble in tech stocks is of particular interest which, to me, it really isn’t, especially considering that we remain well within recent ranges, and that equity dips continue to present buying opportunities. On to the jobs report we go…
LOOK AHEAD – In terms of that jobs report, which stands as today’s main event, headline nonfarm payrolls are set to have risen by +70k last month, a modest uptick from the prior +50k, with unemployment seen having held steady at 4.4%.
As I mentioned in a recent note, though, those headline metrics don’t really tell the full story. Not only is the headline nonfarm payrolls print overstating jobs growth by as much as 60k, almost all private sector job creation over the last year has come from the healthcare sector, so the breakdown of January’s employment growth is something I’ll be keeping a beady eye on later. The same goes for unemployment, which is being kept relatively low largely due to people leaving the labour force – i.e., giving up their job hunt – which is also not exactly a particularly bullish sign. Labour force participation, hence, set to remain unchanged at 62.4%, also bears watching closely.
In any case, one must recall that we get not only the February jobs report, but also the Jan and Feb CPI prints before the next FOMC confab. While a soft report today, of the ilk that NEC Director Hassett and Trump Trade Adviser Navarro appear to have been priming us for, would see the USD OIS curve reprice dovishly, from the present approx. 20% chance of a March cut, policymakers are unlikely to over-react to a single datapoint.
Elsewhere, today, the US sells 10-year notes this afternoon, which should be taken down relatively well, after a solid 3-year sale yesterday. We’re also due to hear from Fed Governor Bowman, FOMC voter Hammack, and non-voter Schmid, while notable earnings today come from the likes of McDonald’s (MCD) and Cisco (CSCO).