US jobs data stronger than expected in October

• US jobs data came in better than expected at 531k in October, with the August and September readings revised up by a net 235k. The headline unemployment rate fell slightly to 4.6% from 4.8% in September, but the labour force participation rate remains well below pre-pandemic levels at 61.6%. This is an indicator that the Fed is watching closely to assess the overall state of the labour market in the US.  Average hourly earnings grew in line with forecasts at 0.4%, slightly slower than in September, but remains elevated on an annual basis at 4.9% y/y.  Nevertheless, the latest data suggests that the impact of the delta variant on job growth over the summer is fading.  US inflation data for October is due later this week and will be closely watched.
• On Friday the House of Representatives passed the USD 550bn bipartisan infrastructure bill, after personal intervention by President Biden in the wake of electoral defeats last week.  House Democrats had previously refused to pass the bill without also approving the USD 1.75tn spending package. Six “progressive” Democrat Representatives voted against the infrastructure bill, but 13 Republicans voted in favour to get it over the line. The bill provides for USD 550bn in new spending on infrastructure (roads, bridges, broadband, clean water, power-grid upgrades) over 10 years and will add USD 256bn to the federal budget deficit over that period.
• The Bank of England left rates on hold at 0.1% at its meeting last Thursday, against the market’s expectation for a 15bp rate hike.  The MPC voted 7-2 to keep rates on hold, suggesting that it was not a close decision despite some policy makers communicating that a rate hike was a possibility in the weeks before the meeting. In the end, it seems MPC members wanted more data on the labour market after the end of the furlough scheme before moving to raise rates, and may still do so as soon as December if the data in the run-up to that meeting is supportive.    
• China’s exports grew by a bigger than forecast 27.1% y/y in USD terms in October, slightly slower than September’s reading.  Import growth picked up from September but was weaker than analysts had expected at 20.6% y/y. Coal imports almost doubled y/y in October. China’s foreign reserves increased by USD 17bn in October to USD 3.22tn in October.
• Dubai has merged the Dubai Economic Department (DED) and the Department of Tourism and Commerce Marketing (DTCM) as it seeks to enhance competitiveness and foreign trade. The new department – Dubai’s Department of Economy and Tourism - will be led by Helal al Marri, and aims to attract 100,000 companies to Dubai over the next three years, boost the number of tourists by 40% to 25mn by 2025 and expand export markets for local products by 50%.

This week’s economic data and events

9 Nov Germany ZEW survey

9 Nov US PPI (Oct) forecast 8.6% y/y

10 Nov US CPI (Oct) forecast 5.9% y/y

11 Nov UK GDP (Q3) forecast 1.5% q/q, 6.8% y/y

11 Nov UK industrial production (Sep) forecast 3.1% y/y

11 Nov ECB publishes economic bulletin

12 Nov US JOLTS job openings (Sep) forecast 10.4mn

12 Nov US University of Michigan Consumer Sentiment (Nov) forecast 72.5

Fixed Income

• Benchmark government bond markets rallied sharply last week although by listening to vocal market commentators, the gains were for all the wrong reasons. US Treasuries gained thanks to a “balanced” stance from the FOMC where it began to taper asset purchases, by USD 15bn per month at least to start with, but also maintained its transitory outlook on inflation and highlighted more room for the labour market to improve into 2022. The move downward in UST yields also seemed to have been aided by short covering after the October NFP as a more than 530k increase in the jobs report caused a more than 7bps drop in 10yr UST yields. For the week as a whole, the 2yr UST yield fell 10bps to 0.4008% while the 10yr dropped a similar amount, settling at 1.4513%.
• In the UK, an index of gilts gained almost 1.8%, outpacing USTs, as the Bank of England surprised markets by voting heavily in favour of keeping rates on hold and pushing back on an aggressive tightening cycle. In the immediate aftermath of the BoE MPC announcement, yields on 2yr gilts fell by as much as 21bps and extended their drop over the final day of trading. Over the course of the week, 2yr gilt yields fell 30bps to 0.4% while the 10yr dropped 19bps to 0.843%. Bunds also responded to pushback from ECB officials on any imminent tightening of policy with 2yr bund yields down 15bps to -0.738% and the 10yr off by 18bps to -0.283%.
• While we expect market chatter to continue chastising developed market central banks as being ‘behind the curve’ there is also likely to be some readjusting of positions and lengthening of timelines for rate hike expectations. Eurodollar futures gained last week with rate expectations for end-2022 and end-2023 falling considerably. That said, the US jobs market data was solid—the lack of movement on the participation rate notwithstanding—and provided that growth follows a steady path forward we expect that UST yields will still move higher by the end of the year.
• The drop in USD yields provided some relief across the emerging landscape with a broad index of USD-denominated EM bonds gaining 0.3% last week. Turkish government 10yr local currency bonds rallied with yields down 75bps to 18.595% while similar South African bond yields fell 25bps to 9.927% and Indian yields fell around 3bps to 6.359%.
• Moody’s affirmed their ‘A1’ rating on Saudi Arabia and also changed the outlook on the sovereign to stable from negative. Elsewhere, S&P affirmed their ‘AA-‘ rating on Qatar with a stable outlook.  

FX

• In a week heavy with central bank newsflow, the dollar managed to—eventually—gain, seemingly on the basis that the Fed’s messaging to the market has been more consistent than other central banks. The DXY index rose by 0.2% to 94.32 at the close of the week with most of the gains coming on Thursday in response to market reaction to the Bank of England.
• Sterling was the notable loser last week among G10 markets, falling by almost 1.4% on Thursday alone as the BoE surprised markets by voting so heavily to keep policy accommodative. GBPUSD closed the week down 1.34% at 1.3498. EURUSD managed a modest gain of 0.08% to 1.1567 although it too fell on Thursday as ECB officials pushed back on market timelines for rate hikes. USDJPY fell almost 0.5% to 113.41.
• Commodity currencies also weakened last week even as central banks in Canada, Australia and New Zealand have all moved toward tightening policy. USDCAD added 0.55% to close at 1.2457 while AUD fell almost 1.6% to 0.7400 and NZD sank 0.75% to 0.7117.

Equities

• Most global equity indices had an exuberant week last week, bolstered by strong earnings results, an upside surprise by the US jobs report, and more dovish decisions by the Federal Reserve and the Bank of England than many market participants had been anticipating. In the US, the S&P 500 added 2.0% w/w to achieve its fifth consecutive weekly gain, the longest since August last year. The Dow Jones closed up 1.4% w/w while the NASDAQ added 3.1%. In Europe, France’s CAC was the major gainer, adding 3.1% w/w. Germany’s DAX added 2.3% while the UK’s FTSE 100 closed up 0.9% on the week.
• Things were more mixed in Asia, where the fallout from the Evergrande crisis weighed on sentiment once more. The Hang Seng lost -2.2% w/w and the Shanghai Composite -1.6%. Japanese stocks had a better week as the Nikkei gained 2.8%. Indian markets were closed on Friday for the Diwali holiday, but the Sensex added 0.5% on Thursday during the one-hour Muhurat trading session, leading to a w/w gain of 0.1%.
• Within the region the DFM was the standout gainer, closing up 8.6% w/w following announcements to list a number of key national firms. There are also plans to encourage more private firms to list on the stock market. Similar listings this year have seen the ADX add 58.9% ytd with a further 1.8% w/w gain last week, while the DFM has lagged to date by comparison with ytd gains of 24.7%.  

Commodities

• Oil prices closed lower last week, despite the decision from OPEC+ to maintain their production increases at 400k b/d per month, slower than many importing nations had been calling for. Brent futures settled 1.9% down at USD 82.74/b while WTI fell 2.8% to USD 81.27/b although both managed to recover some poise on Friday.
• The drop in oil may have been a matter of traders selling the fact and closing out positions in response to OPEC+ choosing to go slow. Regardless, the tightness in oil markets isn’t going to go away any time soon and we expect prices will be elevated well into Q1 2022. While spot prices fell, time spreads for 1-2 months in Brent.

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