US economy

Toasting a satisfying jobs report


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Friday’s US jobs report for March arrived like a well-mixed dry martini, bracing a slug of gin via 196,000 new jobs after February’s weak concoction, together with the merest splash of vermouth as wages expanded at 3.2 per cent for the year to March. In February the annual rise in wages was 3.4 per cent, the fastest clip in a decade. 

The jobs data crowns the first trading week of April with markets exuding growing confidence of a rebound in global activity. Here’s a look at a number of markets testing important levels and the forces driving them.

Global equities via the FTSE All-World index are less than 2 per cent adrift of their peak from last September, with the S&P 500 a little closer to its record high. Momentum favours a test of those peaks, given the pick-up in Chinese data and the resilience of US figures, which together alleviate the fear of a hard landing for the global economy. 

David Riley at BlueBay Asset Management says:

“Today’s jobs report dispels fears that February’s disappointing report portended the ‘end of cycle’ while moderate wage growth will keep the Fed on hold for the foreseeable future, a favourable backdrop for risk markets to perform positively.”

In terms of momentum, this week’s upbeat tone in global data has ignited a breakout in US cyclical shares versus their defensive rivals. This matters as back in August of 2016 this relationship broke above the 200-day moving average and was a harbinger of a pronounced rally for the S&P 500. 

Crucially, the moderating wage pressure in the latest US jobs report keeps the Federal Reserve on the sidelines and it helps confine the 10-year Treasury yield to around 2.50 per cent. Having retreated from the sub-2.40 per cent area, this important benchmark sits well inside its 2.75 per cent level that marked the start of March. In turn, the recent rise in the 10-year yield means it’s back above that of the three-month Treasury bill. That has alleviated the “inverted yield curve” chatter for now. 

With the jobs report in the rear view mirror, the focus on Wall Street and beyond switches to the upcoming quarterly earnings season. The market is looking beyond weak results, so unless companies deliver very bad guidance, the trend remains your friend in equities a little longer. For more on earnings, here’s the latest FT Long View

Clear sailing for equities also beckons as China and the US remain on course to deliver some kind of trade deal. (See Quick Hits below for more on that.)

This is where matters for equities could become interesting. The robust performance of share markets and sectors such as semiconductors in recent months suggests a deal is pretty much baked into the market. Selling the news of a trade deal being confirmed in the coming month is a likely outcome. Indeed, selling in May and heading for the beach may well be the summer trade.

Further gains in oil and other commodities could also be an issue. The price of Brent crude oil has been testing $70 for the first time since mid-November as commodities in general are running hard, with that trend bolstered by signs of Chinese growth picking up. At some point this is a double-edged sword for economic activity, as further gains in oil will nurture higher headline inflation and also raise concerns of “taxing” consumers at the petrol pump.

US jobs data briefly weighed on the dollar on Friday, but the story for 2019 has been the resilience of the reserve currency. A dovish Fed is overshadowed by central banks cooing loudly and that leaves the dollar looking perky.

Indeed, next week’s European Central Bank meeting may well up the ante in cooing, so as to keep the euro in the box. It goes without saying that any firmer signs of alleviating the pain on banks via negative borrowing costs will fire up the Stoxx Banking index. 

At this juncture the dollar index remains near levels of June 2017, as the euro — the biggest weight in this basket — has tested its $1.12 from November and has reversed its ascent to $1.15 in January. A weaker euro provides some relief for European exporters, but not so much for US companies reliant on foreign revenues and grappling with slowing global growth. 

The bigger worry is that further dollar strength could once more test emerging markets and a global financial system reliant on dollar funding. In broad terms, JPMorgan’s EM Currency index is treading the middle ground of this year’s trading range. 

This reflects what the Institute of International Finance dubs “EM overhang”, noting how “a decade of QE left investors overloaded with EM assets”.

The IIF says:

“Because of this overhang, we forecast a relatively modest rebound in non-resident capital flows to EM this year and next.”

So that leaves risk assets with a spring in their step, but a lot of good news is priced in. A correction does beckon, with candidates including higher oil prices and a firmer dollar. But the tone of incoming data, particularly from China, remains the decisive factor.

A great weekend to all readers and much thanks for the feedback. 

Quick Hits — What’s on the markets radar 

Corporate defaults watch — Here’s an interesting line from S&P Global Ratings. They say the global corporate default tally so far this year rose to 34 this week following seven defaults, with five based in the US. This year’s pace is running 25 per cent above that of 2018 at the same point, and up 42 per cent on 2017.

The rating agency’s Diane Vazza says:

“Bankruptcy is the leading cause of defaults this year, with 11 (32%) — all of which were US-based. If this trend continues, this will be the first year since 2010 in which bankruptcy will be the leading cause of default.”

The downside of any China-US trade deal — With a possible agreement between the two countries pushed out to May, many in the market are primed to signal the end of one major macro headache. Chinese President Xi Jinping cited “new substantial progress” from the latest round of talks and that duly boosted mainland shares on Friday.

As we await the terms of any deal and the enforcement mechanism, there will also be collateral damage in the event that China buys a lot more US produce and products.

As Citi highlight, should Chinese import capacity not increase — and that the country imports up to an additional $200bn worth of US goods — “the economies more exposed to China would be the most vulnerable to any adjustment in trade flows”.

They add:

“Asian economies would be the most exposed if trade flows are adjusted from a proportional market share perspective, while European economies face similar losses across all scenarios.”

Your feedback

I’d love to hear from you. You can email me on michael.mackenzie@ft.com and follow me on Twitter at @michaellachlan.





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