Though not clear-cut, market participants had their fears allayed: the US economy added another whopping 263k jobs last month, pushing the unemployment rate down to 3.6 per cent, but wages growth missed forecasts, to print at 3.4 per cent on annualized basis.
3. Markets dash inflation fears: It must also be said that the US labour market participation rate fell too, which tempered some of the market’s enthusiasm. Nevertheless, the thrust of the data was this: the risk of an inflation outbreak is low, it’s been inferred, and that was enough to reignite the bullishness that had been dulled by the Fed.
Crucially, perceived lower risk of higher inflation, and therefore a hiking US Fed, in the short-term manifested US Treasury yields. They dropped across the curve, with the yield on the US 5 Year Treasury note in particular falling 5 basis points.
4. A Fed hike considered no-chance: Interest rate traders have set their bets of a rate cut from the US Fed before the end of 2019 to a roughly fifty-fifty proposition. This is in fact lower than where implied interest rate probabilities have been in the recent past – a rate cut in 2019 has been priced as high as an 80 per cent chance.
But as it pertains to riskier assets: the combination of strong growth, as expressed through jobs gains, coupled with market-measures of inflation expectations suggesting price growth below the Fed’s 2 per cent target, are pushing flows into US equities.
5. Growth and consumer stocks lead Wall Street’s gains: Hence, the S&P500 added 0.96 per cent on Friday, recovering much of the losses sustained in the prior two-day’s of trading. Though volumes were below average, market breadth was substantial, with 83 per cent of stocks higher for the day. Arguably, the most telling feature of market behaviour post-US-NFPs was whereabouts on the sectorial map the gains were made.
US tech-stocks are portraying investors appetite for growth, adding most (around 5 points) to the S&P500 on a weighted basis pm Friday. And the consumer discretionary sector was the best performing in relative terms, as real wages stay well supported in the US economy.
6. Geopolitical re-appears as key market risk: Because of this lead from Wall Street, the last traded price in SPI Futures has the ASX200 adding 31 points this morning. However, the true extent of these implied gains has been thrown into question, after the weekend’s news flow hurled up a series of “bad” news stories.
In an act that might be described as equivalent to a child “chucking their toys out of the pram” for attention, Kim Jong Un’s ordered the launch of new missile tests over the weekend. While last night, US President Trump has suggested increasing tariffs on China if no trade-deal is struck this week.
7. Australian Dollar wears the brunt of “risk-off”: The immediate consequences of these developments has been a big gap lower in currency markets this morning – especially as it related to the Australian Dollar. Ahead of a week that will be significant for the little battler in its own right, the Aussie-Dollar has tumbled in early trading, to trade as lows as 0.6970 (the losses have been even greater in the AUD/JPY).
Keep in mind Japanese markets are still on holiday, so liquidity is going to be thinner than it is ordinarily, and will exaggerate moves in financial markets. Market dynamics aside, the re-emergence of geopolitical risk will certainly drag on sentiment to begin the week.
8. Market watch:
ASX futures up 31 points or 0.5% to 6350 on Saturday morning
- AUD +0.3% to 70.18 US cents
- On Wall St: Dow +0.8%, S&P 500 +1%, Nasdaq +1.6%
- In New York, BHP +2.1%, Rio +2.6%, Atlassian +1.3%, Tesla +4.5%
- In Europe: Stoxx 50 +0.4%, FTSE +0.4%, CAC +0.2%, DAX +0.6%
- Spot gold +0.7% to $US1279.11 an ounce
- Brent crude +0.1% to $US70.83 a barrel
- US oil +0.2% to $US61.94 a barrel
- Iron ore unchanged at $US94.17 a tonne
- Dalian exchange closed
- LME aluminium -1.1% to $US1795.50 a tonne
- LME copper +1.1% to $US6236 a tonne
- 2-year yield: US 2.33%, Australia 1.31%
- 5-year yield: US 2.32%, Australia 1.38%
- 10-year yield: US 2.53%, Australia 1.79%, Germany 0.02%
- 10-year US/Australia yield gap: 74 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG