Markets received a hint on Friday before market opening through @POTUS. The employment numbers, as boasted by Trump, were terrific. The markets shrugged off the possibility of tariffs, trade wars and hostile rhetoric between China and the U.S and reacted as expected. Equities rallied because the numbers point towards growth. Bonds weakened because of the hint of growth.
What happens Monday will be guesswork because the movements are now being decided by whether tariffs are to be imposed and how the allies react to those tariffs.
The jobs data was good and made up for the slack created earlier in the year by the weather and weather events. The slight increase in wages points to a rise in inflation, although that will be very modest. But that’s what bond traders fretted about and that’s what led to the sell-off in bonds.
Rates will be hiked in June with some traders now back to the three more hikes. The downside is that any imposition of tariffs have a high probability of slowing the U.S. and the global economy but we will have to wait a little later in the year for confirmation.
Factory growth in major manufacturing hubs showed signs of cooling in May. Euro-zone factory growth in France and Germany are at 15-month lows. The uncertain trade outlook is hindering growth.
The jobs data reported an increase of 223,000 jobs, creating 15,000 more than expected. Average earnings rose 0.3%. It is unclear how much of that rise is partly due to the lowering of taxes in which case if the rise is associated with tax cuts then the rate of increase will slow markedly.
The other point on the jobs data was that a time-honoured tradition was broken with Trump tweeting the result prior to the market opening. This draws a number of problems. Trump by his actions means that ahead of any economic data traders will be looking to the @POTUS tweets for guidance and how safe sensitive data is with the President. People have gone to jail for early release of data to market participants.
Now that the Italians and Spaniards have sorted out their political difficulties, borrowing costs for both countries have fallen. The yield gap between 10-year bunds and BTP’s is now 227bp from 242 bp on Thursday. Spain’s 10-year fell to 1.33% before closing around 1.44%.
China has not escaped the volatility. The Chinese high yield market has seen prices plummet. Some of the falls have been triggered by adverse equity movements but for many participants, the moves have been unusual. The falls have been upwards of 15 points.
Elsewhere, the BoJ announced that it was trimming its purchases of buying in 5-10 years JGBs. The timing came as a surprise given global market volatility. The move by the BOJ is seen by some as positive because the BOJ holds about 40% of the market and the longer dated issues are now scarcely traded. Illiquidity has now reached such a point that no 10-year JGB’s were traded between Monday and Thursday.
Equities: The S&P 500 rose 1.1%, the Dow rose 0.89% and the Stoxx rose 0.1%.
Currencies: The Bloomberg Dollar Index rose 0.2% while the euro fell 0.3% and the yen fell 0.6%
Bonds: The ten-year closed around at 2.90%. The 2-year closed at 2.47% and the 30-year closed at 3.05%.
The ten-year bund closed at 0.375% and the UK gilt closed at 1.27% and the OAT closed at 0.706%. The U.S. curve closed the day with the following closes 2/10 at 42.6 bp, 2/30 at 57.5 bp and the 10/30 closed at 14.7 bp. The U.S. 5-year closed at 2.747%.
Commodities: WTI fell 2.1% and gold fell 0.4%.
Bitcoin is trading around $7681.
Aussie Market Today.
Expect a rally in equities and a selloff in bonds. Trade and geopolitical risks will set the market trends and, at this stage, it appears to be a lottery.