US jobs market roars in March

• The US jobs market came roaring back in March with 916,000 positions adding according to the latest nonfarm payrolls report. The gains came well above market expectations and were spread across multiple sectors with leisure and hospitality benefitting from easing restrictions and a solid start to Covid-19 vaccinations and construction growing. Weather conditions were also better in March than they were in February when much of the country suffered from a winter freeze. The headline unemployment rate fell to 6% for March compared with 6.2% a month earlier while past months’ NFP reports saw sharp upward revisions to their estimates.
• The US economy has added more than 1.6m jobs in the last three months, an enormously strong start to the year, and the labour market growth will add to expectations that the economy could overheat and prompt inflation spiking in the near term. However, there is still ample slack to be absorbed. While labour market conditions have improved total employment in the US is still 8.4m jobs lower than it was prior to March 2020. We would expect the Biden administration to maintain its still supportive economic policy intact even as jobs numbers will likely continue to perform well.
• Further evidence of the strong US economy came from the March ISM manufacturing index. The index rose to 64.7 for March, its strongest level since the early 1980s, and subcomponents showed broad-based strength. Critically the delivery index, a measure of producers’ access to materials, rose to 76.6 as demand far outpaces the ability of industry to keep up. The risk of demand-pull inflation over the next coming months is growing more acute and will likely keep stakes high in the showdown between debt markets and the Federal Reserve.
• The World Bank has projected a sharp rise in the level of public debt across the MENA region with aggregate across the region rising to 54% of regional GDP in 2020 compared with 46% in 2019. Wide fiscal deficits as economies were affected by the Covid-19 pandemic and oil prices fell leaving few tax resources to draw on helped to push government borrowing higher. A strong bounceback in growth this year is unlikely to be enough to materially affect the aggregate level of debt/GDP, the World Bank finds.

Today’s Economic Data and Events

11:00 TU CPI y/y March: forecast 16.2%

17:45 US Markit Services PMI March: forecast 60.2

18:00 US ISM Services Index March: forecast 59

18:00 US Factory orders: forecast m/m February: -0.5%

18:00 US Durable goods orders m/m: February -1.1%

Fixed Income

• The decline in government bonds resumed last week with indexes for both US treasury and benchmark European debt declining. Yields were higher across the curves and across geographies although relatively modest week/week closes disguised some intraday volatility. Yields on 2yr UST added almost 5bps last week with much of the gains coming in light of the strong US nonfarm payrolls report. Yields on the 10yr managed a rise of more than 4bps, closing at 1.7216% although at one point in the week did move up closer to 1.78%.
• Emerging market local bonds were mixed last week. Turkish 10yr bonds managed to claw back some losses with yields falling from nearly 19% at the start of the week to 17.45% at the close. South African 10yr yields oscillated sharply but close higher over the week at 9.536% while Indian 10yr yields consistently moved higher, closing the week at 6.1768%.
• S&P took a few regional rating actions over the last few days and cut Morocco’s sovereign rating to ‘BB+’ from ‘BBB-‘ and placed the rating on a stable outlook. The agency also affirmed Oman’s sovereign rating at ‘B+’ with a stable outlook.

FX

• The dollar extended gains for a third week running with the DXY index closing at 93.022, a rise of 0.28%. Strong ISM numbers and an enormous nonfarm payrolls report are contributing to the bullish USD case as the economy in the US benefits from vaccinations and large government stimulus.
• EURUSD and USDJPY remain the main vectors for dollar strength at the moment with EURUSD down 0.3% over the week, closing at 1.1759 and representing its third weekly loss in a row. USDJPY added almost 1% over the course of the week and closed at 110.69, although a test of 111 does seem likely in the near term.
• GBPUSD swung throughout the week but managed a 0.3% gain against the dollar. At 1.3822 sterling is holding well above the 1.37 level which would represent a near-term support.
• Performance among commodity currencies was more mixed. USDCAD ended the week roughly neutral at 1.2578 while the AUD gave up 0.35% and the NZD recovered some of the prior week’s losses, rising 0.46% against the USD.

Equities

• Equity markets were back on the front foot last week, with all major global indices recording higher levels. Gains at the close of the week were especially robust, bolstered by a number of strong data points including the sizeable NFP net gain in March and the JP Morgan global manufacturing PMI, which hit a 10-year high.
• In the US, it was the NASDAQ which saw the strongest gains, climbing 3.9% w/w with a 1.8% gain on Friday, although it is still the laggard ytd. At the start of the fourth quarter, the tech-heavy index is up 4.6% since the start of the year, compared to 7.0% for the S&P 500 and 8.3% for the Dow Jones. The S&P 500 gained 2.8% last week, sufficient to take the index above the 4,000 level for the first time
• In Europe, the composite STOXX 600 also hit record highs with a 2.2% w/w gain, despite the ongoing struggle with Covid-19 in many of the continent’s major economies. Despite a slow vaccination rollout and political recriminations in Germany, the DAX gained 3.3% last week, while in France the CAC closed 2.5% higher.
• In Asia, the Shanghai Composite recorded a second consecutive week of gains, although even with ending the week 1.9% higher compared to the previous Friday it remains some -5.7% off the levels recorded in February.

Commodities

• OPEC+ surprised oil markets at the last minute by choosing to increase production over the next three months, rather than roll-over output cuts as we and the market had expected. The producers block is going to add roughly 2m b/d back to markets from May to July in the form of higher production allocations for each member along with Saudi Arabia rolling back its voluntary 1m b/d output cuts.
• Oil prices managed to rise on the back of the OPEC+ decision to increase output, seemingly as an endorsement of better demand expected in the months ahead. Brent futures managed a 0.45% rise to USD 64.86/b while WTI was up a comparatively stronger 0.8% at USD 61.45/b. Murban futures settled at USD 63.90/b in their first full week of trading.
• Forward curves in the oil market endured some divergence in performance. The backwardation in front month Brent spreads widened to USD 0.4/b from USD 0.14/b a week earlier while longer dated spreads actually saw a smaller backwardation. In the WTI market, front month spreads continued to swap between contango and backwardation, albeit at modest levels.
• The drilling rig count in the US continues to push higher with 13 rigs added last week. Since the rig count began rising considerably from September 2020, it has now recovered around 31% of the drop in rig counts catalyzed by the Covid-19 pandemic and sharp drop in oil prices.

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