Solid jobs report clears the way for the Fed to hike

• The February non-farm payrolls report for the US came in at 678k jobs added, far higher than market expectations of around 400k. The jobs growth came across multiple industries with construction, education, leisure and hospitality all rising considerably. The headline unemployment dipped lower, to 3.8% from 4% previously while average hourly earnings were unchanged month on month thought were up 5.1% on year ago levels. The strong labour print with little discernible wage pressure is an ideal data point for the Fed to anchor its first hike of the cycle. Coming on the back of Fed chair Jerome Powell’s commentary to Congress that lined up a hike later this month, markets are expecting a 25bps hike at the March FOMC.
• China has published a growth target of 5.5% this year, its lowest level in more than 30 years. The target was set during the National People’s Congress and also aims to keep CPI inflation at 3% and the fiscal deficit close to 2.8% of GDP. China has never missed its target growth rate and the government may seek to help bolster growth this year via more construction and infrastructure spending. The IMF’s projections for growth in China are actually lower than the government’s with the Fund expecting growth of 4.8% in 2022.
• Financial markets remain fraught as Russia’s war on Ukraine is in its second week. With no imminent sign of de-escalation or negotiations making any headway, market conditions will continue to be determined by headlines on the conflict rather than underlying macroeconomic fundamentals. NATO has so far rejected imposing a no-fly zone over Ukraine as that would bring NATO forces into direct conflict with Russian troops, amplifying already febrile geopolitical conditions.
• The Financial Action Task Force (FATF) has added the UAE to a list of countries subject to increased monitoring, known as the “grey list”. The FATF has recognized the “significant improvement” the UAE has made to its systems to combat money laundering and terrorism financing, but was reportedly concerned about the low level of prosecutions. The UAE has committed to quickly remedy the areas identified by the FATF.  

Today’s Economic Data and Events

11:00 GE Factory orders m/m Jan: forecast 1%

Fixed Income

• Benchmark government bonds rallied last week as investors dumped risk assets in favour of havens. A broad measure of US Treasuries added 1.2% last week while a similar index of European bonds gained almost 1.9%. Much of the moves came in earlier in the week though headline-driven market action kept conditions volatile over the course of the week. The MOVE index of bond market volatility has reached its highest level since the peak of the pandemic in 2020 while FRA/OIS spreads have widened too.
• In US markets yields fell across the curve even as Fed chair Jerome Powell’s commentary to Congress and a strong labour print support the view of a policy rate hike in a few weeks. On the 2yr UST, yields fell more than 9bps last week to 1.4759% while the 10yr yield sank 23bps to 1.7307%. The 2s10s curve closed last week at less than 25bps, its narrowest level since March 2020.
• In European markets the one week move in bonds was dramatic. The 2yr Schatz yield fell almost 36bps to -0.744% while the 10yr bund moved back below neutral to close last week at -0.073%, down 30bps. Rate hike expectations from the ECB have shifted over the last fortnight with markets now expecting a 10bps hike perhaps as early as September, which appears early to us. In the UK gilts also rallied strongly last week with 2yr yields down almost 15bps to 1.051% and the 10y gilt yield down almost 25bps to 1.207%.
• In line with the move away from risk assets, emerging market bonds fell last week. A broad index of USD-denominated bonds was lower by 2.9% last week, its sixth weekly decline in a row. In local currency markets bonds fell as well. South African 10yr yields added 39bps to 10.066% at the end of the week while Indian bonds added 5bps on the 10yr yields to 6.812%. Emerging European bonds dropped heavily, with Polish and Hungarians yields up more than 31bps and 38bps respectively. Yields on Turkey’s 10yr USD Eurobond added 79bps last week to push up above 9% for the first time since the peak of the Covid-19 pandemic in Q2 2020.
• The BUAEUL index of local UAE bonds added 0.66% last week while the yield on the index closed down 5bps to 3.023%.

FX

• Currency markets flooded toward the dollar last week with the DXY index up more than 2% over the five days. EURUSD provided much of the gains, falling by more than 3% to settle at 1.0928 as investors discount more damage to the European economy as a result of the war in Eastern Europe. USDJPY did eventually turn lower as investors sought out havens, closing last week at 114.82, down 0.6% with a drop of 0.9% in USDCHF to 0.9167.
• Sterling sold off by more than 1.3% to 1.3230 against the dollar with a drop of 0.9% on Friday alone. Fears of economic retaliation to sanctions imposed on Russia could threaten the financial system across Europe, catching up the UK as well.
• Commodity currencies were mixed last week. CAD failed to get much benefit of the stark rise in energy costs or the Bank of Canada hiking rates by 25bps last week. USDCAD closed up 0.14% at 1.2731. AUDUSD added almost 2% to 0.7370 while NZDUSD was up 1.7% to 0.6860 over the week as a whole.

Equities

• Global equity markets endured a parlous week last week with many indices seeing their sharpest losses in months as the crisis in Eastern Europe escalated and the chances of a speedy resolution diminished. European markets, closer to the unrest and more exposed to some of the energy price surges, were the biggest losers, with the CAC and the DAX both losing just over 10% w/w while the FTSE 100 dropped -6.7%.
• The selling pressure was less pronounced in North America and Asia, but most indices noted losses nonetheless. In the US, the S&P 500 and the Dow Jones both dropped -1.3% w/w, while the NASDAQ lost -2.8%. In Asia, the Nikkei lost -1.9% and the Hang Seng -3.3%. The Shanghai Composite’s -0.1% fall was less pronounced, while the KOSPI was an outlier as it gained 2.4% w/w.
• By contrast to much of the rest of the world, local markets had a relatively buoyant week as both the DFM (4.1%) and the ADX (6.1%) closed higher. The Tadawul has also been trending higher with regional markets boosted by rising oil prices and the ongoing easing of Covid-19 restrictions.

Commodities

• Energy prices soared last week with gains across the spectrum. Brent futures rose more than 20% to USD 118.11/b while WTI outdid its international peer, rising by 26% over the week to USD 115.68/b. Product prices closed up strongly with low sulphur gasoil futures (European diesel essentially) up 42% as Russia had been a major supplier into Europe of distillates. Natural gas prices rallied strongly with LNG market futures up 40% to USD 38.65/mBtu while UK gas prices rose more than 107% in a single week.
• With fear that Russian exports of energy and other commodities could be disrupted for a prolonged period, commodity markets will be elevated as traders track down any remaining cargoes. In agricultural markets, wheat futures rallied 60% last week while corn futures were up 15%. Metals were also sharply higher: aluminium on the LME added 15% last week and nickel gain 19%. In the precious metals space, palladium rallied 27% to more than USD 3,000/oz while gold gained 4% to USD 1,970/oz.

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