US jobs report smashes expectations

• The US non-farm payroll report for January surprised markedly to the upside in data released on Friday, potentially paving the way for more aggressive tightening by the Federal Reserve at the next FOMC meeting. The net gain in jobs was 467,000, beating consensus projections of 125,000. Meanwhile, the December print was revised up from the initial reading of 199,000 to 510,000, again highlighting the issues around reporting there have been in recent months. Given that these two strong months of jobs gains came while the Omicron variant of Covid-19 surged in the US, the implication is that the labour market is in even more robust health than previously believed. While the headline U-3 unemployment figure ticked up by 10bps, at 4.0% it remains low. On the other hand, average hourly earnings increased by 0.7%, faster than the predicted 0.5% and the CPI inflation print for January due on Thursday is expected to rise to 7.3% y/y. Given these dynamics, expectations for a hike of 50bps at the next FOMC meeting on March 16 are rising, with the market now pricing in a 40% likelihood.
• The risks of a wage-price spiral driving up inflation are also being highlighted in the UK, where BoE Governor Andrew Bailey last week called for ‘quite clear restraint’ when looking for pay rises. This followed the central bank’s rate hike the previous day. The comments were disparaged by labour unions, while the UK government also distanced itself from the remarks.
• There were some mixed economic data points from two of the Eurozone majors at the close of the week. In France, industrial production declined -0.2% m/m in December, missing projections of 0.5% growth. On the other hand, factory orders in Germany expanded 2.8% m/m in December, far exceeding consensus projections of 0.3% growth. Composite Eurozone retail sales declined -3.0% m/m in December, compared to predictions of a -0.9% contraction. 

Today’s Economic Data and Events

• No major data releases today

Fixed Income

• The combination of a hawkish turn from the European Central Bank, higher rates from the Bank of England and a much stronger than expected non-farm payrolls report in the US served to sink benchmark government bonds last week. A broad index of G10 government bonds fell 0.3% last week, its third weekly decline in a row. Markets had been drifting lower steadily over the course of last week but tumbled sharply on Friday as the outlook for much more aggressive policy normalization looks clearer.
• In the US the positive January jobs report helped to push yields substantially at the end of the week. Yields on the 2yr UST added almost 15bps to 1.3099% at the close while in the 10yr yields rose nearly 14bps to 1.9085%. Expectations of five rate hikes gained over the course of last week with markets now pricing in six hikes by Q1 2023.
• Among European bonds the standout move was in bunds. On the 2yr bund, yields added almost 36bps last week to close at -0.256%; that compares with -0.611% at the start of the year. On the 10yr yields added 25bps to settle at 0.203%. In the UK gilt yields rose as the BoE raised rates with the 2yr up almost 30bps to 1.255% and the 10yr adding 17bps to 1.409%.
• Emerging market bonds managed to hold up relatively well even amid the carnage of selling in developed markets. South African bonds rallied last week, with yields falling nearly 12bps on the 10yr local currency bond while Turkish bonds gained substantially with yields down 50bps to 21.745%. Indian bonds were the outlier, with yields up 12bps at 6.873%.

FX

• In currency markets the dollar gave way to rising expectations of tighter monetary policy in both the EU and UK. The broad DXY index fell by 1.8% last week to 95.507 with gains spread across nearly all major peers. EURUSD was the standout with the single currency adding 2.7% last week to close at 1.1449. GBPUSD added almost 1% last week to settle at 1.3531 with Friday’s performance edging lower. USDJPY was essentially unchanged on the week at 115.26.
• In commodity currencies USDCAD was the relative underperformer with the pair falling just 0.1% in favour of the loonie to 1.2757. AUD added 1.2% to 0.7072 while NZD gained more than 1% to 0.6614.

Equities

• Some solid gains towards the end of the week saw all three major US equity indices close up w/w, clawing back some of their recent losses. Some key strong earnings results helped give some confidence back to the market, and the Dow Jones closed up 1.1% w/w, the S&P 500 1.6% and the NASDAQ 2.4%. However, the three indices remain down ytd, by -3.4%, -5.6% and -9.9% respectively.
• European equity markets were more mixed, and while the UK’s FTSE 100 added 0.7% w/w and Italy’s FTSE MIB 0.1%, the CAC lost -0.2% and the DAX -1.4%.
• Asian markets looked stronger, and in India, the Nifty added 2.4% and the Sensex 2.5%. In East Asia the Hang Seng closed up 2.5% w/w and the Nikkei 2.7%. The Shanghai Composite was closed last week for the lunar new year holiday.

Commodities

• Oil prices remain on an upward trajectory with both WTI and Brent futures gaining for seventh week in a row last week. Brent settled at USD 93.27/b, up 3.6% while WTI added more than 6.3% to settle at USD 92.31/b. NOCs from the GCC region have raised their official selling prices amid what appears to be robust demand and anxiety over supply security in the near term.
• In the US, exploration and drilling companies added another three rigs to operation last week and are now just shy of 500 in total. Texas and North Dakota remain the main areas accruing rigs as shale patch operators invest for higher output in the coming months.
• Elsewhere among commodities gold managed to hold its ground while bond markets sold off sharply. Industrial metals were generally higher last week with copper and iron ore both gaining while aluminium slipped. 

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