US jobs market roars back

• Preliminary data show that the UAE economy contracted by -7.4% y/y in Q2 2020. Data from the UAE’s Federal Competitiveness and Statistics Authority (FCSA) indicated a -9.9% contraction in the non-oil sectors of the economy, while the hydrocarbons sector declined just -1.4% y/y. This is much less than the -6.4% y/y drop in crude oil production in Q2 2020 and suggests that investment in the sector largely offset lower crude production. If this is the case, our full year 2020 GDP growth forecast of -6.9% (based on a -7.5% contraction in oil & gas) looks too pessimistic.
• The US labour market bounced back strongly in February with non-farm payrolls showing a monthly increase of 379k jobs added last month. January’s figure was also revised up to 166k compared with an initial estimate of just 49k previously. Most of the gains last month came in the leisure and hospitality sectors thanks to the easing of some of the more stringent Covid-19 regulations across the US but the overall headline unemployment level dipped down to 6.2% from 6.3% a month earlier.
• Wage growth remains at high levels of more than 5%. However, this reflects that most of the job losses endured during the Covid-19 pandemic have been borne by low-income workers with limited wage negotiating pressure. While the monthly increases in employment will certainly be welcome—and helped to propel yields on 10yr USTs back above 1.60% briefly—the US economy is still operating with 9.5m fewer jobs than it was prior to the Covid-19 pandemic. This persistent gap is the driving force behind the Fed’s commitment to keep policy accommodative for longer than the market currently seems to expect.
• The US Senate approved the USD 1.9trn American Rescue Plan which will now proceed to the House of Representatives once more. Several of the more generous elements of the plan were notched downward—such as lowering additional unemployment benefits to USD 300/week rather than USD 400 and keeping cash handouts of USD 1,400 away from high income households.
• China’s government has set an economic growth target of over 6% for real GDP this year, a reasonably modest aim considering the economy should be bouncing back strongly from the Covid-19 pandemic which limited growth to just 2.3% last year. Statements emerging from the National People’s Congress would seem to imply China is credibly targeting more balanced growth and avoiding relying on infrastructure spending as a main driver for the economy. The more modest than expected growth target for China could temper optimism about a broader fast-paced global recovery in 2021.
• Also in China exports jumped in the January-February period by more than 60% y/y in USD value thanks to persistent demand for technology and medical supply goods globally. Imports also gained strongly, up more than 22% y/y during the period thanks to healthy domestic demand. China’s trade data is benefitting from base effects given that the economy was essentially closed at the start of 2020 but the data are nevertheless welcome prints for the start of this year.

Today’s Economic Data and Events

11:00 GE Industrial production (Jan): forecast -3.7% y/y

19:00 US Wholesale inventories (Jan): forecast 1.3% m/m

Fixed Income

• The selling in US treasury markets continued apace last week despite reassurances from Federal Reserve Chair Jerome Powell that policy would remain accommodative. Markets seemingly wanted a clearer signal that the Fed would step in directly to stem the rise in long-term bond yields and failing that—along with the positive NFP—yields across the curve pushed higher.
• Yields on 2yr USTs have shown considerable movement given the variables weighing against them and closed the week at 0.1369% after hitting at high as 0.1527%. Yields on the benchmark 10yr added 16bps over the course of the week, closing at 1.566% after a peak of more than 1.62%.
• Among other benchmark bond markets the movements were less bearish with yields actually pushing lower in German, UK and Japanese bonds. Emerging market USD bonds fell a fourth week in a row, however, as rising USD costs threaten the near-term growth outlook.
• In local currency EM bond markets ZAR remains under pressure with a near 25bps spike in yields last week (closing at 9.291%). In Turkey 10yr TRY yields closed up almost 12bps over the week at 12.965% while in India yields were stickier at 6.231%, showing little relative movement.

FX

• Currency markets were characterized by dollar buying last week with the broad DXY index up more than 1.2%. Positive non-farm payrolls and a Fed seemingly not standing in the way of the current rise in UST yields helped to propel the greenback higher against most peers. The index settled at 91.977, breaking above its 100-day moving average with a target of 92.462 next in sight.
• FX weakness was acute in the EURUSD pair which fell 1.33% to 1.1915. That was its first weekly close below 1.20 since late November 2020. Eurozone GDP and the ECB decision will be in focus this week. USDJPY also propelled higher as traders pull out of the low yielding pair: USDJPY at 108.31 at the close is at its highest level since June 2020 with 109.23 as a next potential target.
• GBPUSD’s relentless upward rise has stalled with the currency down 3.2% from a late February peak of 1.42. Last week’s close of 1.3841 opens the way for a first test of resistance at 1.3754 and failing that 1.35 could be at play.
• CAD was the only notable gainer against the USD last week, helped by the surge in oil prices on the back of the OPEC+ to keep production unchanged. The pair closed down 0.6% at 1.2659.

Equities

• There was a measure of market turbulence last week as the reflation chatter continued to hit equities, but gains on Friday saw two out of three of the major US indices close up compared to the previous week. A 2.0% gain on Friday for the S&P 500 saw the index close up 0.8% w/w, while the Dow Jones closed up 1.8% w/w following gains to the same magnitude on Friday.
• The exception was the NASDAQ, which is more exposed to the tech sector and the so-called ‘meme stocks’ which have found an enthusiastic following among retail investors but endured heavy losses over the past week. Even the 1.6% gain seen on Friday was not sufficient to shrug off the losses recorded earlier in the period, and the index closed down -2.1% w/w.
• In the inverse, European equity indices recorded losses on Friday but closed up over the week as a whole. The STOXX 600 European composite gained 0.9% w/w, as the DAX gained 1.0% and the CAC 1.4%. The big winner of the week was the FTSE 100 which closed up 2.3% w/w, bolstered by the budget announcement by Chancellor of the Exchequer Rishi Sunak.
• In Asia, the Hang Seng gained 0.4% w/w and the NIFTY 2.8% while the Shanghai Composite, the Nikkei and the KOSPI closed down -0.2%, -0.4% and -2.4% respectively. Within the region the DFM closed up 1.7% w/w and the Tadawul 0.5%.

Commodities

• Oil prices were the standout performer in commodity markets as OPEC+ announced it would keep production levels unchanged for April. Brent settled up 4.9% at USD 69.36/b while WTI closed above USD 66/b, a gain of 7.5% on the week. A test above USD 70/b seems likely in the short-term given the tightness that OPEC+ is imposing on markets.
• Elsewhere metals markets weakened. Gold prices fell for a third week running and closed at the USD 1,700/troy oz handle. They did close below that level during the week, however, as the rise in UST yields—both nominal and real—weighs against the yellow metal. In industrial metals nickel fell almost 12% thanks to easing supply concerns while copper was off by 2% to USD 8,895/tonne.

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