The S&P advanced to fresh all-time high after softer than expected US labour market data led to investors bringing forward expectations for Fed rate cuts. The S&P closed 0.5% higher extending the year-to-date gains to 17%. European equities closed lower as the market looked ahead to the second round of the French election. Early projections suggest the left wing coalition, New Popular Front, has unexpectedly won the most seats which will raise concerns about the fiscal backdrop. Treasury yields fell across the curve and the US dollar closed the week modestly weaker against the majority of G10 currencies.
US non-farm payrolls rose 206K in June, slightly above the 190k consensus. However, there was a large downward revision of 111K for the previous two months. The unemployment rate unexpectedly increased to 4.1%, from 4.0% in May. Average hourly earnings increased 0.3% during the month and at 3.9% annual rate matching expectations. The quarterly employment cost index, due at the end of this month, will provide a further information on wages.
The Fed will be increasingly concerned about the labour market with the unemployment rate moving above 4%. This is set against the backdrop of a deterioration in jobless claims, a softening in hiring intentions and job openings having returned to pre-pandemic levels. The market is fully discounting two 25bps Fed rate cuts by December. There is about 20bps of easing priced for the September FOMC.
US treasury yields declined following the data led by the front end which saw the curve steepen modesty. 10-year yields fell 8bps to 4.27%, ending the week at the yield lows. The 10y/30y treasury curve has continued to steepen reaching 20bps which is the highest level since February. European bonds rallied alongside US treasuries with 10-year bunds closing down 5bps at 2.55%. There was limited market reaction to weak industrial production in Germany, which was well-below economists’ estimates, though could be related to the timing of public holidays.
The Peoples Bank of China (PBOC) has taken a further step aimed at cooling a rally in China government bonds (CGB) which have recently fallen to record low yields. The PBOC has signed agreements with major banks to borrow bonds and has said it has ‘hundreds of billions’ at its disposal. It has borrowed the bonds on an unsecured open-ended basis and any intervention will be dependent on market conditions. 10-year CGBs have stabilised near 2.25% around 5bps above the all-time lows.
The US dollar was volatile around the labour market data and ultimately ended weaker against the majority of G10 currencies. The dollar index closed on the weekly lows. In the majors, EUR/USD made modest gains reaching 3-week highs, although caution ahead of the French elections likely constrained the topside. USD/JPY was unchanged near 106.80. The Canadian dollar underperformed after weaker than expected domestic labour market data with the unemployment rate unexpectedly increasing to 6.4%.
The NZD was the top performing G10 currency on Friday night with NZD/USD advancing above 0.6140 and closing at 3-week highs. The NZD is firmed on the major cross rates. NZD/AUD traded 0.9100, and the uptrend in NZD/JPY continued, with the pairing making fresh multi-decade highs towards 98.80.
NZ fixed interest markets ended modestly lower in yield in the local session Friday with a curve flattening bias. 10-year government bonds closed down 4bps at 4.64%. The move lower was matched in swaps with 10-year asset swap spreads stable near 20bps, the widest level since early April. Australian 10-year government bond futures are 5bps lower since the local close, suggesting a downward bias for NZ yields on the open.
There are no domestic releases and only second-tier international data to start the week. Looking further ahead, the RBNZ Monetary Policy Review is the main risk event on Wednesday. Selected price indices, manufacturing PMI and electronic card transactions will also be of interest. US CPI data for June is the key international data release as well as Fed Chair Powell’s testimony to US politicians.
[chart;daily exchange rates]
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