The “goldilocks” mood that was unleashed after Friday’s jobs report (high growth, low inflation) has spread around the globe, sending Asian and European markets higher as trade-war concerns took a back seat to economic optimism. The dollar slipped and Treasuries held strady even as the US Treasury prepares to sell $145 billion in debt today (including both 3Y and 10Y Paper), while most commodities fell.
“Friday’s U.S. employment data was about as perfect a set of figures as you can get from a policy maker’s point of view. The increase in jobs was nothing short of amazing,” said ACLS Global’s Marshall Gittler. “In other words, it was a ‘Goldilocks’ report: not too hot, not too cold, just right.”
“Our customers are still bullish,” Chris Brankin, chief executive officer at TD Ameritrade Singapore, told Bloomberg TV. “You saw the jobs report last Friday, which was a perfect scenario — you had an uptick in wages, but not too much. Investors have taken that opportunity to buy the market dips and we look for the bull market to continue.”
European shares shot up across the board, following their Asian counterparts, while emerging market currencies strengthened as investors bought up so-called riskier assets and sold safe haven securities such as gold and government bonds. After the S&P surged 1.7% on Friday – its second best day of the year – S&P futures have continued to levitate overnight, and are back above 2,800 and fast approaching their late January all time highs of 2,883.
The Stoxx Europe 600 Index rose for a sixth day, poised for the longest winning streak since October as utility companies set the pace following a bid by EON for RWE’s Innogy. Germany’s DAX led gains in Europe, rising 0.9% while MSCI’s world equity index hit a two-week high. Concerns over tariffs have been weighing on European stocks, with the main European stock index hitting a seven-month low at the start of the month. It has recovered somewhat from that trough to rise 0.3% on Monday.
Earlier, the MSCI Asia-Pacific ex-Japan Index climbed 1.4 percent, poised for a third session of gains. South Korea rose 1%, while Australia’s main index added 0.7 percent, boosted by mining shares on news that Australia could be exempt from new U.S. trade tariffs on steel and aluminum imports. Hong Kong stocks climbed with other Asian markets after Friday’s U.S. jobs report showed an increase in hiring without rapid wage gains: the Hang Seng gained 1.9%, its third day of gains, and the highest since Feb. 5. The Hang Seng China Enterprises Index jumped 2.1%, also up for third session, while on the maindland, the Shanghai Composite added 0.6% and the ChiNext Index of smaller shares rose 1.4%.
In global FX, investors shifted their focus to politics sending the Aussie higher after the country secured an exemption from U.S. tariffs on steel and aluminum and as politicians from a wide range of other countries joined the chorus to also be on the list of Trump tariff exemptions. Meanwhile, as noted last night, the yen jumped after Japan’s Finance Minister Taro Aso refused to step down despite news that his name and that of Prime Minister Shinzo Abe were removed from documents connected with a land-sale scandal, creating uncertainty around the future of Abenomics. The advance however was pared after Aso said he won’t resign.
Commenting on the USDJPY, Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo said that “The theme for 2018 is the risk of the dollar-yen breaking 100,” adding that the yen above that level “wouldn’t look excessive from the perspective of its fundamentals.” Separately, Goldman analysts said that the BOJ and the Japanese government have “very limited” policy options for reining in yen appreciation, and they are most likely to take a wait-and-see stance until the latest round of gains comes to an end.
Investors had trimmed holdings of yen last week on news U.S. President Donald Trump was prepared to meet with North Korean leader Kim Jong Un, a potential breakthrough in nuclear tensions in the region. U.S. officials on Sunday defended Trump’s decision, saying the move was not just for show and not a gift to Pyongyang. “Now the U.S. is back to goldilocks at least for now, the tariffs are less severe, and Kim and Trump are to meet,” said Shane Oliver, Sydney-based chief economist at AMP. “We still expect more volatility this year as many of these issues have further go run, but the broad trend in shares likely remains up.”
The dollar edged lower a second day as markets digested Friday’s jobs report, which kept stocks in Asia and Europe underpinned.
In geopolitical news, North Korea reportedly wants a peace treaty and to build ties with US, while its leader Kim also wants a US embassy in Pyongyang.
In Brexit news, UK and EU companies reportedly could face an additional GBP 58bln in annual costs in the event of a no-deal Brexit. Meanwhile, UK consumer spending suffered its weakest start to the year since 2012, according to data compiled by Visa.
In rates, the yield on 10-year Treasuries climbed less than one basis point to 2.90%,the highest in more than two weeks. Germany’s 10-year yield dipped one basis point to 0.64%, while Britain’s 10-year Gilt rose less than one basis point to 1.493 percent.
Today, US rates traders will have a very busy day with the US set to sell $145BN in sells 3- and 6-month bills, as well as a 3-year notes and 10-year notes reopening. Big concessions into the auctions are expected to help soak up the massive supply. As a reminder the last time that the market faced a 3y and 10y auction on the same day last year Treasuries sold off following weak demand in the latter auction.
Oil prices pared back gains seen on Friday with WTI (-0.5%) and Brent (-0.6%) seen lower amid concerns of rising US output looming in the market despite a slowdown in rig drilling activity recorded at the back end of last week. In the metals complex, following the US steel and aluminium tariffs, Chinese iron ore future fell for a 3rd straight session hitting near four-month lows closing down 2.6%. The steelmaking raw materials are under pressure from softer demand and high product inventories held by trading companies. The WSJ reported that OPEC is reported to be divided regarding views on the right price of oil with Iran said to prefer USD 60/bbl, while Saudi Arabia would prefer prices to be at USD 70/bbl. There were also reports that Iran Oil Minister Zanganeh stated that OPEC could agree in June to begin relaxing oil output cuts for 2019.
Bulletin Headline summary from RanSquawk
- DAX outperforms amid multi-billion revamp in German utility sector.
- USD-index hovers around 90, having trimmed earlier losses.
- Looking ahead, highlights include the Eurogroup meeting, 3- and 10-year note auctions from the US
Market Snapshot
- S&P 500 futures up 0.3% to 2,798.25
- STOXX Europe 600 up 0.3% to 379.19
- MXAP up 1.6% to 178.46
- MXAPJ up 1.4% to 588.82
- Nikkei up 1.7% to 21,824.03
- Topix up 1.5% to 1,741.30
- Hang Seng Index up 1.9% to 31,594.33
- Shanghai Composite up 0.6% to 3,326.70
- Sensex up 1.2% to 33,713.20
- Australia S&P/ASX 200 up 0.6% to 5,996.12
- Kospi up 1% to 2,484.12
- German 10Y yield unchanged at 0.649%
- Euro up 0.2% to $1.2328
- Italian 10Y yield rose 2.5 bps to 1.753%
- Spanish 10Y yield unchanged at 1.436%
- Brent futures down 0.6% to $65.10/bbl
- Gold spot down 0.3% to $1,320.39
- U.S. Dollar Index down 0.1% to 89.98
Top Overnight News
- North Korean leader Kim Jong Un wants to sign a peace treaty and establish diplomatic relations with the U.S., which includes having a U.S. embassy in Pyongyang, Dong-A Ilbo newspaper reports, citing an unidentified senior official at South Korean President Moon Jae-in’s office
- China’s trade minister Zhong Shan warned that a trade war with the U.S. would bring disaster to the global economy, but said his nation won’t start one and that talks with the Trump administration continue
- China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements
- Add one more thing to the list of worries for the world’s most indebted nation: weakening demand at its bond auctions. While there’s no danger of the U.S. being unable to borrow as much as it needs, over the past two years, the drop-off has been unmistakable
- Britain may soon start to see the beginning of the end of austerity, as the Chancellor of the Exchequer prepares to announce the smallest deficit in a decade during his Spring Statement on Tuesday
- London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital’s most expensive areas seeing the biggest declines, according to a report published by Acadata on Monday
Asia stocks were higher across the board as the region took its first opportunity to react to Friday’s rally on Wall St and jobs data from US where NFP smashed expectations, but wage growth slowed which in turn provided a goldilocks backdrop for stocks. ASX 200 (+0.6%) was led by commodity names after crude rallied over 3% on Friday and PM Turnbull confirmed Australia is to be exempted from US tariffs. Nikkei 225 (+1.6%) outperformed but closed off its best levels as the cronyism scandal continued to haunt PM Abe after Japan’s Finance Ministry confirmed documents had been doctored in a land-sale to a school operator which allegedly used ties to PM Abe’s wife to get a cheap deal on state-owned land. Elsewhere, Hang Seng (+1.5%) and Shanghai Comp. (+0.7%) also gained although the mainland got off to a slow start as US-China trade war concerns somewhat lingered and as participants also mulled over Xi’s power consolidation after China’s legislature voted to formally scrap presidential term limits from its constitution. Finally, 10yr JGBs are flat with demand constrained amid the heightened appetite for risk, while the BoJ were also in the market but kept its Rinban amounts unchanged from the prior. The PBoC injected CNY 50bln via 7-day reverse repos and CNY 40bln via 28-day reverse repos; the PBoC also set CNY mid-point at 6.3333 (Prev. 6.3451).
As reported last night, Japanese Finance Minister Aso is under pressure to resign over a report regarding alleged favours to a school with connections to the Japanese PM Abe. The prime minister told parliament in February last year that he’d resign if any link emerges between himself or his wife Akie and the land deal.
Top Asian News
- China Banking Crisis Warning Signal Still Flashing, BIS Says
- JPMorgan Sees Busiest Mideast Year With IPOs, M&A Driving Deals
- Japan Finance Minister Under Fire as Abe School Scandal Deepens; Stock Investors Are Nonchalant for Now as Abe’s Scandal Deepens
- China’s Mystery Russia Oil Partner Seen Delaying $9 Billion Deal
The European cash open mimicked the strong positive sentiment seen in Asia and in the US on Friday following US NFP data beating expectations but wage growth slowing down providing a goldilocks backdrop for stocks. Major bourses are in the green (Euro Stoxx 50 +0.45%) with the exception of the FTSE 100 underperforming weighed down by a strong sterling. DAX 30 is supported by the utilities sector outperforming following reports of RWE (+8.8%) agreeing to swap control of Innogy (+12.9%) for renewable assets with rival E.ON (+5.4%). E.ON has agreed to purchase Innogy from RWE as part of a deal valuing at EUR 20bln, marking one of the largest shake-ups of the European power supply market. This could however place doubt on the deal between Innogy’s Npower and UK listed SSE (-2.2%). Following months of attempted takeover, Melrose (-2.9%) has submitted their final offer to engineering group GKN (+0.8%) of GBP 8.1bln following their previous offer of GBP 7.4bln which GKN described as “fundamentally” undervaluing its business and the approach as “entirely opportunistic”.
Top European News
- Elkem to Raise $670 Million in Biggest Norway IPO Since 2010
- May Faces Calls to Retaliate Against Russia After Spy Attack
- Ruble Is Top Pick for $25 Billion Investor After Czech Bonanza
In FX, it has been a quiet start to the week, but the Greenback is weaker vs all G10 counterparts bar the Loonie, as Usd/Cad hovers above 1.2800 after last Friday’s mixed US and Canadian jobs data (to recap, the former blew away forecasts at 300k+, but latter just missed and would have been negative without part-time workers). The Kiwi is outperforming amidst equity market gains and mostly risk-on trade as it regains 0.7300 status vs the Usd, but Usd/Jpy has pulled back from marginal 107.00+ highs post-NFP to around 106.50 on the land sale scandal involving PM Abe and Finance Minister Aso. Note also, tech resistance around the 21 DMA at 106.79 is capping the pair, but hefty option expiries at 107.00 run off this Thursday and could keep the headline afloat. Aud another relative gainer and firmer within a 0.7845-80 range as Australia negotiates a security deal with the US to avoid aluminium and steel tariffs. Usd/Chf is probing back below 0.9500, Eur/Usd is sitting in a tight band above 1.2300 and Cable is holding between 1.3850-80 ahead of Tuesday’s UK Budget. Back to option expiries, but for today there is 1 bn either side of 1.2300 in Eur/Usd at 1.2275 and 1.2330 and just over 300 mn in Nzd/Usd at 0.7300.
In commodities, oil prices pared back gains seen on Friday with WTI (-0.5%) and Brent (-0.6%) seen lower amid concerns of rising US output looming in the market despite a slowdown in rig drilling activity recorded at the back end of last week. In the metals complex, following the US steel and aluminium tariffs, Chinese iron ore future fell for a 3rd straight session hitting near four-month lows closing down 2.6%. The steelmaking raw materials are under pressure from softer demand and high product inventories held by trading companies. The WSJ reported that OPEC is reported to be divided regarding views on the right price of oil with Iran said to prefer USD 60/bbl, while Saudi Arabia would prefer prices to be at USD 70/bbl. There were also reports that Iran Oil Minister Zanganeh stated that OPEC could agree in June to begin relaxing oil output cuts for 2019.
Looking at the day ahead, as is the norm post payrolls, it’s a quiet start to the week on Monday with the only data of note being the US monthly budget statement for February. Politics should remain at the forefront, however, with Germany’s Chancellor Merkel expected to sign a coalition pact with the Social Democrats in Berlin and Italy’s Democratic Party due to hold a leaders’ meeting to replace Matteo Renzi. EU government officials will also kick off the four-day meeting to discuss the EU’s Brexit position.
US Event Calendar
- 10:30am: U.S. to Sell USD45 Bln 6-Month Bills
- 10:30am: U.S. to Sell USD28 Bln 3-Year Notes
- 12pm: U.S. to Sell USD51 Bln 3-Month Bills
- 12pm: U.S. to Sell USD21 Bln 10-Year Notes Reopening
- 2pm: Monthly Budget Statement, est. $216.0b deficit, prior $192.0b deficit
DB concludes the overnight wrap
So, another week and another hotly anticipated US inflation print for markets to be wary of. In fact, it should be a fairly busy week ahead with plenty of US data despite it being a post payrolls week, bumper Treasury supply which should be a decent test for bond markets and of course unpredictable politics to keep everyone on their toes. Indeed, no doubt the uncertainty fuelled by steel and aluminium tariffs tit-for-tat could continue, while markets will also be waiting for potential further details about President Trump’s meeting with North Korea leader Kim Jong Un. One of the big question marks is where they’ll meet exactly and we can’t help but feel that we could see some sort of Olympics style pitch between nations to host this hotly anticipated event.
On a more serious note the reaction to the proposed meeting has actually been fairly mixed. The optimistic view is that a summit between the US and North Korea could offer a genuine opportunity to reduce tensions on the Korean peninsula, particularly in light of the failures of past agreements. However there appears to be an equal amount of scepticism with some suggesting that it could be an opportunity for North Korea to secure sanctions relief and buy time on nuclear efforts. Only time will tell but it’s clearly a very significant moment for geopolitics globally. Over the weekend CIA Director Mike Pompeo confirmed that the US will be making no concessions to North Korea and that discussions, if they do indeed occur, “will play out over time”.
Back to that big data release for this week, as of this morning the market consensus is for a +0.2% mom headline reading and +0.2% core reading for US CPI on Tuesday. Our US economists expect +0.1% mom and +0.2% mom respectively. The latter should hold at +1.8% yoy should we see that, and in fact our colleagues add that the annual growth rate of core CPI will mechanically rise by around 20bps in the March data release just from annualizing the -10% decline in wireless telephone services.
Meanwhile, also due tomorrow is the Special Congressional election in Pennsylvania which shouldn’t be underestimated as it will likely be seen as a decent bellwether for the prospect of Republicans holding onto majorities in the House and Senate at the November midterms. So that should be interesting. On the same day we’ll have the UK Spring Statement although our rates team and economists aren’t expecting any big policy announcements. The market should instead be focused on the publication of the 2018-19 Gilt remit. You can see a preview of the Statement here. In terms of other snippets, Germany’s Merkel and the Social Democrats are expected to sign a coalition pact today, while Italy’s Democratic Party will also start the search for their new party leader. Brexit related newsflow should also continue with the European Council and European Commission expected to make a statement on Tuesday while the four-day EU ambassadors meeting kicks off today.
All that to look forward to then. Over the weekend it’s actually been fairly quiet for newsflow with the most notable coming from China with the – as expected – announcement that the presidential term limit has been repealed, which in turn will allow President Xi Jingping to in theory hold onto power indefinitely. The other story worth noting is the latest BIS quarterly report which notes that China, Canada and Hong Kong are among those economies most at risk of a banking crisis, based on early warning indicators. The report also pointed towards the dangers of increased passive investing, particularly with regards to “encouraging aggregate leverage”. Elsewhere, on the big protectionist theme reverberating through markets at the moment, China’s trade minister Zhong noted “there are no winners in a trade war…China does not wish to fight a trade war, nor will China initiate one, but we…will resolutely defend the interests of our country”. In Germany, Economy Minister Zypries noted “Trump’s policies are putting the order of a free global economy at risk” and that Europe needs to avoid being divided by Trump’s offer to exempt some countries such as Canada, Mexico and Australia.
So, with the likely highlight for markets this week being Tuesday’s CPI report, it of course follows the softer than expected average hourly earnings data from Friday’s employment report. In fairness, it only just missed consensus as the unrounded +0.1498% mom compared to expectations for +0.2% mom however downward revisions to prior months meant the annual rate dropped to +2.6% yoy from +2.8% and back to the lowest since November. On the other hand, the other big takeaway from the report was the bumper payrolls number. The 313k print not only smashed expectations for 205k but was also the highest since July 2016. The two prior months were also revised higher by a cumulative 54k. Away from those usual headline grabbers’ one interesting aspect of the report, and which typically flies more under the radar, that our US economists pointed out was the increase in prime-age participation. Fed Chair Powell previously noted in his testimony that still low prime-age labour force participation is one remaining potential source of labour market slack. However, it was noticeable to see this climb four-tenths last month and to the highest since mid-2010. The bottom line is that this could still lend argument to the fact there is still some slack left in the labour market.
All-in-all a bit of a double-edged sword sort of report then. Markets certainly appreciated the goldilocks nature of it with the S&P 500 rallying to a +1.74% gain by the close of play – and touching the highest level since February 1st -and 10y Treasuries climbing to 2.895% (+3.7bps). Fed Funds contracts are now implying odds of just under 25% for 4 rate hikes this year. We’ll of course find out in 9 days time at the next FOMC meeting if the data is enough to support an increase in the median dot to 4. Speaking of bond markets, it’s worth noting that the Treasury market is likely to face a bit of a supply test today as we’ll get both a 3y and 10y auction. As a reminder the last time that the market faced a 3y and 10y auction on the same day last year Treasuries sold off following weak demand in the latter auction.
This morning risk assets are broadly higher in Asia following the positive US lead, with the Nikkei (+1.49%), Kospi (+0.99%), Hang Seng (+1.48%), ASX 200 (+0.55%) and China’s CSI 300 (+0.49%) all up as we type. Markets in Japan have pared back gains slightly following news that Finance Minister Taro Aso is supposedly coming under pressure to quit according to Bloomberg due to his involvement in a scandal related to the sale of public land to a school.
Moving on. In terms of other markets on Friday. The Nasdaq rose +1.79% and to a fresh record high. European equities were broadly higher with the Stoxx 600 up for the fifth straight day (+0.43%) while the DAX was the laggard (-0.07%). Government bonds were weaker with core 10y bond yields up 2-3bp (Bunds & Gilts +1.9bp) while peripherals slightly underperformed. In FX, the USD dollar index fell 0.10% while the Euro was marginally down and Sterling gained 0.28%. Finally, WTI oil was up for the first time in three days (+3.19% to $62.09/bbl) while precious metals gained slightly.
Away from markets, three unnamed sources told Reuters that ECB staff put forward a scenario to policy makers at last week’s ECB meeting suggesting the bank will end QE this year after winding down for three months followed by a rate increase in the middle of next year. One source noted these are “assumptions…. (and they) don’t have policy relevance because they are not commitments”. Notably, sources noted the hypothesis was met favourably by policy makers from the Euro area’s richer Northern countries, but less so by the Southern neighbours.
On Friday we also heard from a couple of Fed speakers post the employment report. The Fed’s Rosengren noted that “I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace – and perhaps a bit faster than the three (rate hikes) envisioned for this year”. He also added that as the labour market continues to tighten “….one would expect to see continued upward pressure on wages”. Elsewhere, the Fed’s Evans noted the payroll report was a “very strong number” and was “looking forward to strong wage growth”. On rates, he noted that he continues to be nervous about inflation running below the Fed’s 2% target and believes “…we have the ability to be cautious”.
With regards to the other economic data on Friday. In the US, the unemployment rate was steady mom at its 17 year low and slightly higher than expected at 4.1% (vs. 4.0%). Elsewhere, the final reading for January wholesale inventories was revised up 0.1ppt to 0.8%. Factoring in the above, the Atlanta Fed’s estimate of Q1 GDP growth was revised down 0.3ppts to 2.5% saar. In Europe, the January IP was broadly lower than expectations. In Germany, it was -0.1% mom (vs. +0.6% expected) weighted down by lower activity in the construction sector. Notably, annual growth is still solid at +5.5% yoy. France and the UK’s IP were both lower than expected at +1.2% yoy (vs. +3.8% expected) and +1.6% yoy (vs. +1.9% expected) respectively. Elsewhere, Germany’s January trade surplus was less than expected at €17.4bln (vs. €18.1bln) as exports weakened in the month, while the UK’s January trade deficit was -£3.1bln (vs. – £3.4bln expected).
As is the norm post payrolls, it’s a quiet start to the week on Monday with the only data of note being the US monthly budget statement for February. Politics should remain at the forefront, however, with Germany’s Chancellor Merkel expected to sign a coalition pact with the Social Democrats in Berlin and Italy’s Democratic Party due to hold a leaders’ meeting to replace Matteo Renzi. EU government officials will also kick off the four-day meeting to discuss the EU’s Brexit position.
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After a judge ruled that lawmakers had been illegally withholding records such as emails and their daily calendars from the press and public, the Washington legislature rushed through a bill exempting most of those records from the state’s 
