US April jobs report disappoints

• The April NFP report in the US disappointed sharply to the downside in data released at the close of last week. The net gain in jobs last month was just 266,000 – a marked slowdown from the 770,000 added in March, which was itself a downgrade from the initial print of 916,000. The April figure was also far short of consensus projections which held that there would be a net jobs gain in the region of 1mn. Meanwhile, initial jobless claims in the week to May 1 came in at 498,000. This was the first time in over a year that weekly claims came in below 500,000 but remains far higher than the pre-pandemic norm of around 200,000 each week. While there have been improvements in the labour market, the total number of jobs remains over 8mn lower than before the pandemic and headline unemployment has ticked back up to 6.1%, from 6.0% the previous month. This latest NFP report will strengthen the hands of the Federal Reserve and the President Biden administration in their argument that the economy still requires significant support – whether in the form of monetary or fiscal stimulus. Reacting to the figures, Biden said that there was ‘still a long way to go.’
• A major US East Coast refined products pipeline has still not restarted after a cyber attack two days ago. A major US conduit for gasoline, the longer the outage continues, the greater the likelihood of higher prices at the pump, which will further stimulate headline inflation.
• The Bank of England held its May MPC meeting on Thursday, and while the Bank Rate was left unchanged at 0.1%, the bank did signal that it would slow the pace of its quantitative easing programme – but not the volume, and its statement stressed that this move was purely operational and should not be seen ‘as a change in the stance of monetary policy.’ The MPC members voted 8-1 to continue its asset purchases to the target of GBP 895bn, with outgoing economist Andy Haldane preferring to cut it by GBP 50bn given his concerns over potential inflation. As with the Federal Reserve, the bulk of the BoE’s MPC believes that any inflationary spike will be driven by ‘transitory developments’ which ‘should have few direct implications for inflation over the medium term.’ In any case, the committee shared the view that the economy was rebounding strongly, and it adjusted its unemployment and growth projections accordingly.
• Turkey’s central bank also held its MPC meeting on Thursday, and here also the benchmark one-week repo was left unchanged at 19.0%, as had been widely anticipated. The language in the communiqué was relatively hawkish, stating that ‘the current monetary policy stance will be maintained until the significant fall in the April Inflation Report’s forecast path is achieved’, helping to dispel some residual market fears that the bank would begin cutting once again under the governorship of Sahap Kavcioglu, appointed in March. Nevertheless, with inflation at 17.1% in April, keeping the one-week repo on hold leaves real rates below 2.0%.

Today’s Economic Data and Events

12:30 Eurozone Sentix investor confidence index, May: forecast 15.0

16:00 Canada Bloomberg Nanos confidence index, May

Fixed Income

• US Treasuries responded swiftly to the disappointing April non-farm payrolls report, with yields on the 10yr falling to as low as 1.46% after the data was released. Yields bounced back quickly though and actually managed to end the day higher, closing the week at 1.5771%, a drop of around 5bps.
• Overall Treasuries rallied last week led by the belly of the curve where 7yr UST yields fell more than 7bps. Gains on the front end were more muted with 2yr UST yields slipping by a bit more than 1bps to 0.1448%. While the April jobs number was a disappointment to exaggerated market expectations of as much as 1m jobs being added it still represents one data point, rather than a trend. It does though affirm to us that the Fed will stick to its accommodative policy well into 2022.
• European and emerging market USD bonds also managed to record gains last week as markets still held to a general risk-on tone. Local currency bonds also rallied: yields on 10yr Turkish government bonds fell 46bps to 17.27%, abetted by the central bank there which keep rates on hold at 19% last week. South African yields fell 25bps on the 10yr to 9.026% while Indian bonds did manage to dip below 6% mid week but closed at 6.015% on the 10yr, down 1bps.
• Regional markets will likely be quiet given holidays across much of the Middle East this week. S&P affirmed Egypt’s sovereign rating at ‘B’ with a stable outlook.
• Central bank action is concentrated in emerging markets this week where central banks in the Philippines and Mexico meet Thursday and Colombia and Peru hold decisions on Friday (UAE time).

FX

• The disappointment in April’s non-farm payrolls meant the dollar was offered across the board. The broad DXY index fell by 1.15% to 90.233, with heavy losses on Friday alone. The 90 level has proven to be a resistance point for the DXY index in the last six months and recent losses now mean the DXY index is up just 0.3% for the year.
• EURUSD contributed to the bulk of the dollar selling with the pair rising 1.2% to 1.2166. USDJPY has also pushed solidly below the 109 level, dropping 0.65% last week. GBP remains on an uptrend, closing last week just shy of 1.40. Meanwhile commodity currencies all recorded strong gains, led by AUD which added 1.66%, benefitting from the RBA inkling toward some form of tightening policy at its July meeting.

Equities

• Equity markets largely closed the week higher than the previous Friday, despite some sharp sell-offs seen earlier in the period. The weak jobs report, and the assumption that this makes the Fed more likely to keep to its position of keeping policy loose for the foreseeable future, bolstered markets at the end of the week.
• Tech stocks were particularly affected by turbulence last week, and the tech-heavy NASDAQ did remain down -1.5% w/w, despite recouping some losses with a 0.9% rise on the Friday. The Dow Jones was the strongest performer in the US last week, gaining 2.7% w/w, while the S&P 500 closed up 1.2%.
• In Europe, the FTSE 100 gained 2.4% w/w, closing on Friday at its highest level in 14 months. The DAX gained 1.7% w/w and the CAC 1.9%.
• In Asia, Indian and Japanese stock markets staged a partial recovery last week following earlier sell-offs as the two countries saw rising Covid-19 case numbers. The Nikkei gained 0.8% w/w (now down -1.4% m/m), while India’s Nifty gained 1.4% w/w, and is now flat with where it was a month ago.

Commodities

• Oil prices rose for a second week running with Brent futures adding 1.5% at USD 68.28/b and WTI closing at USD 64.90/b, a gain of more than 2%. Oil prices barely acknowledged the US jobs numbers and were largely unchanged on Friday.
• The tone for oil this week will be set by forecasts from OPEC, the IEA and EIA where market focus will likely be on how the major institutions rally still high oil prices with the collapse in demand in India. 

Click here to download charts and tables