US nonfarm payrolls surprise massively to the upside

US nonfarm payrolls surprised massively to the upside in January with a net gain of 517,000 compared to the consensus prediction of 188,000. Meanwhile, December’s print was revised upward from 223,000 to 260,000. While the strong jobs report could be a sign that the Fed has managed to successfully orchestrate a soft landing, there are also concerns that it has in fact still not done enough to cool the economy sufficiently to quash inflation, and average hourly earnings rose 0.3% m/m in January, with the December gain revised up to 0.4%. The headline number was also greeted by some scepticism given the magnitude of the upside surprise, with speculation that the figure was thrown off by annual benchmarking and an update of seasonal factors and population controls and could well be revised. The headline unemployment fell back from 3.5% in December to a 53-year low of 3.4% even as the participation rate rose from 62.3% to 62.4%.

Turkish CPI inflation came in at 57.7% y/y in January, down from 64.3% in December but higher than the consensus prediction of 53.8%.   This was the slowest pace of annual price growth since last February and is much lower than the October peak of 85.5%, with favourable base effects and moderating global commodity prices driving the slowdown. However, loose monetary and fiscal policy will likely keep inflationary pressures salient through the coming months, and m/m inflation accelerated markedly to 6.7% in January from 1.2% in December and was stronger than the predicted 4.0%.

India’s composite PMI fell modestly in January, dropping to 57.5, from 59.4 the previous month. The services PMI came in at 57.2, down from 58.5. The RBI is set to make its benchmark interest rate decision on Wednesday, with the consensus expectation being for a 25bps hike to 6.50%, which could be the last of this hiking cycle as inflation comes back within the bank’s target range.

Regional PMIs were also published over the weekend which we will be writing up in a separate note.

Today’s Economic Events and Data

• 11:00 Germany factory orders, % m/m, December. Forecast: 2.0%

Fixed Income

• US Treasuries endured a volatile week, buttressed by a dovish interpretation of the FOMC’s downshift to 25bps hikes mid-week but then buffeted by the enormous January payroll that sets the Fed up for potentially even more hikes. All told, price action over the course of the week was relatively minimal as Treasuries had a round trip higher on Wednesday but then lower on Friday. Yields on the 2yr UST closed the week higher by about 9bps at 4.2886% but had jumped by 18bps on Friday alone. The 10yr yield showed only a gain of 2bps for the week as a whole but spiked by 13bps on Friday.
• Market pricing for future Fed moves pitched higher on Friday as markets increased expectations for another hike in May which would take the Fed Funds up to 5.25% should the Fed stick with 25bps increments.
• European bond markets also sank sharply on Friday, spiking on the release of the January NFP and erasing some of the post-ECB gains. The rally in benchmark eurozone bonds following the ECB’s 50bps hike and pledges of more to come seemed at odds with the hawkish messaging and the NFP may have provided the necessary impetus for eurozone bonds to actually pay attention to ECB messaging.
• Emerging market bonds closed Friday lower as there was a broad risk-off move following the NFP. However, for the week as a whole EM bonds still managed to pull higher with an index of USD-denominated EM bonds up 0.4% for a sixth week in a row of gains.
• In central bank action this week the RBA sets policy on February 7 (25bps hike expected) while the RBI meets on February 8 (25bps hike expected).

FX

• If 2022’s dollar rally is dead, last week may have been a last gasp of air. The DXY index jumped nearly 1% last week, its first rally in the last four weeks, as the nonfarm payrolls report raised prospects that the Fed will actually back up its commentary calling for more rate hikes with actual rate hikes. Losses against the dollar were uniform with EURUSD down 0.7% last week at 1.0795, including a drop of more than 1% on Friday alone. GBPUSD was the dominant loser, even after a 50bps hike from the Bank of England, falling by 2.6% to 1.2056 over the week as a whole (down 1.4% on Friday). USDJYP added almost 2% on Friday to 131.19, taking its weekly gain to 1%.
• Commodity currencies also sank with AUDUSD down 2.5% last week to 0.6923 while NZDUSD also fell by 2.5% to 0.6331, with both currencies down by 2.2% on Friday alone. USDCAD added 0.6% over the week to 1.3397 at the close on Friday, moving up by 0.6% on Friday alone.

Equities

• There were losses across the board in US equity markets on Friday as the strong jobs report led to suspicion of higher-for-longer policy from the Fed, but the week as a whole was more mixed. While the Dow Jones ended Friday down 0.2% w/w, both the S&P 500 (1.6%) and the NASDAQ (3.3%) ended higher.
• There were also gains in Europe where central banks were seen to be relatively dovish. The FTSE 100 added 1.8% w/w, the CAC 2.0% and the DAX 2.2%. East Asian markets were less buoyant with the Hang Seng ending the week 4.5% lower and the Nikkei adding just 0.5%, but the ytd gains remain robust.
• Locally, the DFM closed up 1.6% w/w and the ADX 2.0%.

Commodities

• Oil prices sold off heavily last week with Brent down 7.8% to close at USD 79.94/b and WTI down by 7.9% to USD 73.39/b. Last week was Brent’s first close below USD 80/b since January 9.
• The G7 and EU agreed to a price cap of USD 100/b on Russian diesel to be implemented from February 5. The plan will work along the same lines as the price cap on Russian crude oil; namely any third-party importer looking to make use of services from G7 or EU insurance or shipping firms will need to buy at or below the price cap level.
• Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, took a cautious stance on the market in comments to the press over the weekend and noted the sell-off in oil in the last few weeks seemed to affirm the OPEC+ plan to cut output in October last year. He also warned that sanctions on Russia would only contribute to “lack of energy supplies…when they’re most needed.”