The US labour market recorded another strong month in October with 261k jobs added according to the latest non-farm payrolls report. While that does represent the slowest pace of jobs growth since December 2020 it nevertheless was ahead of market expectations and the gains were widespread across multiple industries. Average hourly earnings gains also accelerated month/month to 0.4%, up from 0.3% recorded in the prior two months. There were some signs of cooling according to the report—the unemployment rate went up to 3.7% from 3.5% a month earlier as there was a substantial drop in the household employment survey. However, the persistent strength in the US labour market will keep the Federal Reserve on a hawkish tilt with respect to policy, even if it plans to slow the pace of tightening at future FOMC meetings.
Market focus this week will be on the US midterm elections on November 8th where the Republican party looks set to capture ground in Congress. Control of either the Senate or the House of Representatives would allow the Republicans to stymie president Joe Biden’s domestic agenda, including on economic issues, and would likely lead to a negative impulse from fiscal policy just as the US economy moves toward a pending slowdown or recession.
COP 27, the latest UN climate change conference, also begins this week in Egypt. The priority for the conference looks to be implementing some of the announcements agreed at COP26, held in the UK last year, such as development of a market for carbon credits or offsets and getting a deal on finance for climate change adaptation strategies for lower income economies.
Today’s Economic Data and Events
- 11:00 GE Industrial production September: forecast 2%
Fixed Income
- US Treasuries oscillated on the release of the October jobs report with an initial pop higher in yields fading later in the session. The front end of the curve held on to its late rally with a 5bps drop in yields on the day to 4.6584% while the 10yr closed essentially unchanged at 4.1584%. For the week, however, yields were steadily higher as markets absorbed another 75bps hike from the Fed and no apparent sign of pivoting toward easier monetary policy any time soon. Market expectations for the terminal rate in the US have now pushed comfortably above 5% by mid-2023.
- European bond markets closed the week softer with yields on 10yr bunds up by 5bps on Friday to 2.289% and French 10yr bond yields adding almost 6bps to 2.824%. Messaging from the ECB is getting more hawkish though the peak in rates is still likely to fall short of the Fed.
- Emerging market bonds closed mixed at the end of the week with some heavier selling in Indonesia and Turkey 10yrs offset by gains in South African and broader EM European bonds.
FX
- Currency markets moved against the dollar at the end of the week with a 1.8% drop in the DXY index on Friday alone. EURUSD led the gains with a rally of 2% to 0.9957 even as the US jobs report sets markets up for more sustained rate hikes from the Federal Reserve. GBPUSD added almost 2% on the day, recovering from its Bank of England spurred losses to close at 1.1379 while USDJPY dropped by 1.1% to 146.62.
- Commodity currencies also rallied strongly. USDCAD moved down by 1.9%, dropping to its lowest level since mid-September. AUDUSD added 2.9% to close at 0.6470 while NZDUSD added 2.7% to settle at 0.5931.
Equities
- Equity markets were mixed last week, with strong gains on Friday in most markets following losses in earlier sessions. However, even the pullback at the close of the week was not sufficient for the benchmark US indices to close up, with the Dow Jones, the S&P 500 and the NASDAQ dropping -1.4%, -3.4% and -5.7% w/w respectively, weighed down by the messaging from Jerome Powell post the FOMC.
- By contrast, European markets had a fairly strong week, with the CAC and the DAX adding 2.3% and 1.6% w/w. The UK’s FTSE 100 gained 4.1%, although this was boosted in part by the 2.0% drop in the pound over the week. The more domestic focused FTSE 250 added 2.4%.
- Locally, the DFM closed flat w/w while the ADX added 1.9%.
- In Asia, speculation around easing of the zero-Covid strategy saw the Hang Seng gain 8.7% w/w. The Nikkei by contrast closed down -0.5%.
Commodities
- Oil markets rallied hard at the end of the week on market hopes that China will provide an initial easing of its Covid-zero policy. While the move would only be cutting fines that airlines pay if they bring cases of the virus into the country, the gain in oil markets shows how sensitive they are to any indication of China opening up more of its economy.
- Brent futures added 4% on Friday to close at USD 98.57/b while WTI added 5% to USD 92.61/b. Time spreads remain solidly in backwardation with the 1-2 month Brent spread at USD 1.67/b last week while the same time spread in WTI closed the week at USD 1.16/b.
- A general risk on move at the end of the week helped to lift metals markets as well with gold prices adding 3.2% to USD 1,682/troy oz and silver prices jumping 7% to USD 20.86/troy oz. In industrial metals, copper led the way with a gain of 7% to USD 8.099/tonne, its first close above USD 8,000 since August.
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