US payrolls data easily beat expectations which provided upward momentum for stocks and higher US Treasury yields. Services ISM unexpectedly fell to 50.3 from 51.9 in April with the prices, new orders and employment subcomponents all falling

US equites remain well-supported taking the S&P to fresh 2023 highs and into bull market territory following the gains from the lows in October last year. The rally in equities has contributed to the VIX, a measure of expected volatility and investor risk appetite, falling to 15 which corresponds with the post-pandemic lows. US payrolls data easily beat expectations on Friday night which provided upward momentum for stocks and sharply higher US Treasury yields which have largely been maintained into the start of the week.

Payrolls increased 339k which was well above the 195k consensus and upward revisions added a further 93k jobs from the previous two months. While job creation was robust, other labour market indicators were mixed with the unemployment rate, which is sourced from the Household survey, increasing to 3.7% from 3.4% the previous month which is the highest level since October last year and above consensus expectations of 3.5%.

The rapid job growth was accompanied by slowing wage gains with average hourly earnings increasing 4.3% over the year. The annual rate remains too high from the Fed’s perspective but if the current monthly rate is sustained annual growth will dip below 4% in coming months. The mixed signals from the labour market data may support the narrative of a pause or skip in the hiking cycle by the US Federal Reserve at the upcoming June meeting.

Services ISM, released overnight, unexpectedly fell to 50.3 from 51.9 in April with the prices, new orders and employment subcomponents all falling. This takes the index back towards its recent low in December 2022 and points towards slower growth in payrolls and wages.

Market pricing points to a roughly one quarter chance of a further 25bps rate hike at the June FOMC. There are no further Fed speakers scheduled before the meeting as we enter the blackout period. Ahead of the payrolls data, Fed speakers had indicated they intend to keep rates steady in June suggesting that skipping in June would give policy makers greater time to assess the data but not preclude future tightening. Expectations for Fed policy rates later in 2023 have almost fully priced out the chance of rate cuts for this year.

US Treasury yields surged in the aftermath of the labour market data with 2y yields increasing close to 15bps to reach a high above 4.5% on Friday evening. Yields continued to drift higher to start the week before the weaker than expected services ISM contributed to a pullback. US 10y yields moved lagged the move resulting in the 2y-10y yield curve slope flattening further and leaving the curve the most inverted since the regional bank stress in March.

The US Dollar was supported by higher yields into the weekly close and has since given up some of the gains following the ISM data overnight. NZD/USD has managed to recover a touch from the 2023 low below 0.6000 reached last week. However, the NZD underperformance continued relative to AUD, with NZD/AUD falling below 0.9180 and looks set to test the lows from April near 0.9150.

Oil prices spiked yesterday after the OPEC+ meeting where Saudi Arabia said it would cut 1 million barrels of oil a day amid concerns over slowing global energy demand. The Saudi energy minister said he will do whatever is necessary to bring stability to the market and that the output cut was for July and on top of previously announced curbs, which would be extended until the end of 2024. Oil prices couldn’t maintain the outsized gains but remain higher.

With NZ debt markets closed on Monday for the long weekend there will be upward pressure on local rates at the open. Australian 3 and 10-year bond futures have moved close to 15bps higher in yield terms since the NZ close on Friday. There are no domestic data releases today and the focus will be the Reserve Bank of Australia rate decision.