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After a tumultuous week for global bond markets, partly driven by the strength in continued upward surprises to US economic releases, the focus on Friday night was the monthly US labour market data. Non-farm payrolls increased 209k which was marginally less than the 225k expected but there were large downward revisions of 110k to previous months. Payrolls growth is slowing in a sign that the Federal Reserve interest rate hikes are beginning to temper strength in the labour market. The unemployment rate fell back to 3.6%, from 3.7% in May, and wage growth was stronger than expected rising 4.4% on an annual basis.
Despite slowing payrolls growth, the labour market data is consistent with the US Federal Reserve raising rates in late July. Futures markets are pricing close to 90 per cent chance of a 25bps rate increase and a roughly 50% of a follow up 25bps hike. Market pricing for the Fed funds rate track hasn’t adjusted a great deal over the past week despite the large sell-off in long end Treasuries suggesting position unwinding was one of the key drivers contributing to the rise in yields as technical levels were breached.
US Treasury yields fell after the payrolls release with the 2-year trading from 5.0% down to a low of 4.86% before partially retracing the fall. After a volatile week which saw front end yields reach the highest level since 2007, 2-year Treasuries closed at 4.95%, up 5bps from the previous Friday. 10-year treasury yields dipped following the data but fully retraced the move to end 3bps higher on the day and 20bps higher on the week. The long end underperformance saw the yield curve steepen throughout the week, having previously inverted to -110bps, which is close to the levels reached in March ahead of the US banking sector stress. 10-year gilt and bund yields were little changed on Friday closing at 4.64% and 2.63% respectively.
Labour market data in Canada surprised with a larger than expected increase reversing the weakness seen in May. Payrolls increased 60k, easily outpacing expectations for a 20k gain, driven by full-time employment. The unemployment rate increased to 5.4% as growth in the population and labour force outpaced employment. Strong jobs growth increased market pricing to a 70% probability for a 25bs hike by the Bank of Canada at this week’s policy meeting.
The Peoples Bank of China (PBOC) continued to signal its discomfort with Yuan weakness by setting Friday’s fix stronger than expected by the largest margin since November. The fix has been set consistently strong over the past few weeks and domestic banks have lowered US Dollar deposit rates in a bid to support the Yuan. However, these measures are set against the backdrop of large US-China rate differentials and divergent respective monetary policy outlooks which may limit the effectiveness. It is likely the PBOC will continue to push back against USD/CNY strength with strong fixes and the potential to make further adjustments to discourage long USD positions.
The US Dollar made broad-based losses against developed market currencies following the labour market data. The Yen led the advance against the Dollar, extending the gains made in the Asian session, to end the week close to 142. The Canadian Dollar gained on the cross-rates but couldn’t maintain the outperformance following the strong local jobs data. NZD/USD pressed higher overnight Friday, amid the softer US Dollar environment, trading back towards 0.6220 before retracing into the weekly close. NZD/AUD was marginally softer into the close, trading near 0.9280, having moved close to 1% higher during last week.
It was a volatile session in the domestic rates markets on Friday with global moves and position unwinding contributing to a sharp move 15-20bps move higher in yields. Australian 10-year futures are around 3bps higher in yield since the local close on Friday while the 3-year futures are little changed. There is no domestic data of note today and a limited international economic calendar.
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