Strong nonfarm payrolls (NFP) data did indeed surprise last Friday, completing a week of whipsaw data that also featured a softer-than-expected U.S. gross domestic product (GDP) report. However, the bigger surprise was the dollar weakening in turn crushing many expectations. In the end, the strong unemployment headline was not enough to change the tune that capital markets have been playing for some time. If anything, it confirms that the weather-related bounce back is happening. The key to the buck’s weakness lies with the Federal Reserve but it’s going to take some time to gauge the underlying performance of the economy. That provides Fed Chair Janet Yellen and company breathing room and with wage inflation so tame, there is no reason for the Fed to change its “lower for longer” message. However, with Q3 (the third installment of quantitative easing) on the table, the dollar has problems.
The boost to market sentiment provided by NFP data did not last long. Global equities start the week on the back foot, as investors digest the latest sign of weakness from China’s manufacturing sector. Investors are also keeping an eye on the spreading conflict in Ukraine. With London on a public holiday, trading will be somewhat subdued. Nonetheless, a disappointing Chinese HSBC manufacturing purchasing managers’ index for April is not helping (48.1 versus 48.3). This morning’s print continues to defy the steadying trend in official stats; however, not all is bad news. Despite the final headline being downgraded, there were signs of stabilization in total orders and production, with both indices rising month-over-month for the first time in 12 months. This tidbit of positivity would suggest that Beijing’s mini-support measures are helping to prevent a steeper downturn in Chinese GDP.
German Bunds, U.S. Treasurys Climb
The accumulations of various geopolitical concerns and economic disappointments have safe-haven assets again in demand. Bunds and U.S. Treasurys, which dipped briefly following the NFP report but quickly recovered, have managed to inch higher this Monday as the market heads stateside. Even the yen is trading sub-¥102, while commodities — especially gold — has found some of its long lost support striding toward $1,315 in the late European session.
Similar to the U.S. yield curve, the two- and 10-year German Bund spread is just holding above its +131bps low. The curve is certainly flatter after last week’s high print of +135bps. The market expects stop losses to be an issue on a break of this lower level. However, there is an outside chance of a full return to the +115bps low from 12 months ago. The difficulty, as with its transatlantic counterparty, has to do with demand. U.S. Treasurys and German Bunds require a fresh bout of bullish sentiment, which is difficult at such low yields – the 10-year Bund is currently straddling +1.45% and eyeing +1.40%, while its U.S. counterpart is trading at +2.58%.
Yellen Testimony in Focus
From a currency perspective, it’s a similar situation. There are no surprises with the EUR again trading steady early Monday morning though for many, technical analysis data indicates a strong likelihood the 18-member single currency will rally versus the greenback this week. The EUR is supposed to be firmly supported by the Bollinger upward channels on both the daily and weekly charts – at €1.3685 and €1.3861, respectively. This would suggest to any EUR bull that buying the single currency on dips is the way forward in the short term. However, through these support levels expect many ‘long’ positions to begin seeking an exit. The EUR uptrend should continue to guide the bulls toward that psychological €1.4000 channel — a level where the European Central Bank is expected by many to become more “vocal.” For the time being, the trend remains your friend.
Other highlights this week will be the Aussie rate decision on Tuesday, where no change is expected. The Reserve Bank of Australia is expected to closely monitor the jobs numbers Down Under among signs that the economy there is picking up. On Wednesday, Yellen testifies before the Congress Joint Economic Committee on monetary policy and the U.S. economic outlook. After avoiding a press conference at last week’s Federal Open Market Committee meeting, and mostly skipping monetary policy themes in a speech on Thursday, the Fed’s head may be forced to clarify her thoughts on the economy. The market will be looking for anything in reference to last week’s supposedly strong jobs report.
After NFP, ECB, Russia and the Dollar In Focus