US jobs data shows need for stimulus

• The US added only 49,000 jobs in January, according to the latest non-farm payrolls report, and December 2020 saw a larger than previously estimated decline of 227,000. Headline unemployment fell to 6.3%, its lowest level since the Covid-19 pandemic took hold but was helped lower by a dip in the overall level of the labour force. The jobs data pushes back against a recent string of strong releases from other sectors in the US economy—PMI numbers have shown good figures for January—and will reinforce the drive by the Biden administration to enact its USD 1.9trn support and stimulus package.
• Even as some Covid-19 related restrictions have been removed in the US the performance of the job market highlights the fraught nature of the economic recovery. No single sector showed any considerable outperformance in job growth with leisure/hospitality reporting declining along with manufacturing, retail trade and others. Initial jobless claims for the last week of January did tick down to 779,000 but continuing jobless claims have hit a plateau at around 5m, more than twice as high as pre-pandemic levels.
• The US Senate voted in favour of using the budget reconciliation process to get the administration’s spending plans through, with Vice-president Kamala Harris using her tie-breaking vote to give the Democrats a 51-50 victory. Congressional committees will now spend the next few weeks writing up their legislation to incorporate the spending plans before a vote that won’t require any Republicans to support it.
• The Bank of England voted unanimously to keep rates on hold at 0.1% and its current quantitative easing target of GBP 895bn unchanged at its first monetary policy committee meeting for the year. The BoE did revise lower their expectation for Q1 growth on the back of Covid-19 lockdowns that are in place across much of the UK but noted that the strong progress the UK has made on vaccinations will allow the economy to recover “rapidly towards pre-Covid levels” this year. The Bank also pushed back on expectations for the introduction of negative rates for at least the next six months.
• The RBI also left policy unchanged, holding the repo rate at 4%, and raised its growth forecast for the 2021 fiscal year to 10.5% from a contraction of 7.7% in the current fiscal year ending in April. Inflation has moved back within the RBI’s target range in its latest print—CPI inflation fell to 4.59% in December from over 6.9% a month earlier—and the bank will likely keep rates on hold until there is any feed through to the economy from the large spending plans announced by the government earlier in the week. The RBI did remove some of the accommodative policy introduced during the pandemic, announcing plans that it would rollback lower cash reserve ratios.

Today’s Economic Data and Events

• Germany Industrial Production (Dec): 11:00 forecast 0.3% m/m

Fixed Income

• Disappointing US jobs numbers stressed the need for additional fiscal support and helped to sink US Treasuries last week. Along with a strong risk-on tone to markets generally, benchmark yields jumped higher over the course of the week with 10yr UST yields closing out at over 1.16%, a near 10bps move, while yields on the 30yr UST rose more than 14bps to close at 1.97%.
• However, the front end of the curve remains anchored at low levels as central banks are still largely keeping policy accommodative. The 2s10s curve has steepened to more than 100bps, its highest level since 2017, while the 5s30s spread at more than 150bps is its steepest since 2015.
• Benchmark bonds in general fell last week thanks to optimism over the pace of vaccine rollouts in key economies—10yr gilts closed down more than 1.3% with the yield approaching 0.5%. High yield and emerging market debt gained even as many emerging economies are lagging or haven’t even begun vaccination programmes.
• Central bank action this week includes Sweden (no change expected), Philippines (no change expected), Mexico (25bps cut in consensus) and Russia (no change expected).

FX

• Last week the USD strengthened across the board. Starting just above the 90.5 mark, the DXY advanced to highs of 91.6, a rally of more than 1% at the time. A disappointing labour market report for January reversed half of these gains on Friday alone and the DXY closed at the 91 handle, still an increase of 0.46% for the week, but such a dramatic decline may highlight a lack of confidence in the greenback going forward.
• USDJPY fell for the first time in eight days on Friday after reaching its highest level since October at 105.77. It was a very modest drop off however, settling at 105.4 and the pair still gained nearly 0.7% on the week.
• The EUR fell from highs of 1.2137 to its lowest point since November at 1.1952 before bouncing back and closing at 1.2050 following the USD's slide, but still marked a loss of over 0.7%. Sterling ended the week with modest gains at 1.3732, despite at one point dropping to a low of 1.3567, boosted by comments from the Bank of England which effectively shut the door on the prospect of negative rates.
• The AUD closed 0.4% higher at 0.7678 after spending most of the week in the red while the NZD is little changed at 0.72 despite some choppy movement.

Equities

• Global equity indices returned to growth last week following the social media-driven sell-off the week prior, with risk-on tone supported by positive news on the US stimulus and vaccine development fronts. In the US, both the S&P 500 and the NASDAQ hit new record highs, closing the week up 4.7% and 6.0% respectively. The Dow Jones gained 3.9% w/w, but remains a fraction lower than its January 20 all-time high.
• There was similar positivity elsewhere. In Europe, the FTSE 100 enjoyed a 1.3% rise, its first w/w gain after three weeks of losses. The DAX and the CAC saw even stronger growth at 4.6% and 4.8% respectively.
• India’s stock markets enjoyed extraordinary growth last week following the announcement of the government’s highly expansionary budget for the remainder of the current fiscal year (ending March 31) and the coming one. The NIFTY closed up 9.5% w/w while the SENSEX gained 9.6%. Other Asian equity indices were more muted, but also positive. The Shanghai Composite gained 0.4% w/w, but the Hang Seng gained 3.6% and the KOSPI 4.9%.
• Within the region the DFM lost -1.0% w/w after closing -1.5% lower on Thursday, while the Tadawul lost -2.2%.

Commodities

• Oil prices recorded a strong week of gains with both WTI and Brent futures hitting their highest levels in the past year. Brent settled up 6.2% at USD 59.34/b while WTI rallied nearly 9% to close at USD 56.85/b.
• Forward structures continue to improve as well as inventories globally draw down. The 2021-22 Dec WTI spread closed at more than USD 3/b while the same spread for Brent is above USD 2.80/b.
• Both OPEC and the IEA will release their monthly oil market reports on Thursday this week with demand forecasts likely to gain more scrutiny. While vaccine rollouts have been strong in some major markets (the US and UK for instance) they are still lagging in major emerging economies. Forward prices have also rallied to levels that may encourage hedging activity by producers in the US and elsewhere, setting up a second half with potentially more barrels coming into the market.
• Gold prices sank a second week running as investors turned to risk assets like equities. The metal closed at USD 1,814/troy oz, down 1.8% and did move below the USD 1,800/troy oz handle during the week.

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