US non-farm payrolls matched consensus but a rise in the jobless rate raised expectations for a 25bp Fed rate cut later this month. Treasury yields declined led by the front end while US equities edged higher

US equities made modest gains and treasury yields fell after the US labour market report, which saw pricing firm for a 25bp Fed rate cut, later this month. The S&P edged up 0.2% to close the week 1% higher. The US dollar ended on a firm footing, particularly against growth sensitive currencies, within the G10 basket. Brent crude prices traded towards US$71 per barrel. Official data revealed China’s central bank restarted gold purchases in November after a six month pause.

US nonfarm payrolls increased 227K in November, closely matching consensus estimates and bouncing back from the weak October print, which was impacted by the Boeing strike and hurricanes. In addition, there were upward revisions totaling 56k for the previous two months. Average earnings were firmer than expected increasing 0.4% in the month and at a 4.0% annual pace.

Although payrolls are running at a three-month average of 173k, there were some signs of weakness in the household survey. The unemployment rate increased to 4.2%, from 4.1% in October, set against the backdrop of a 355k drop in household unemployment and a drop in the participation rate.

University of Michigan consumer sentiment rose to 74.0, which was marginally above expectations. Consumers’ expectations for inflation five-to-ten years ahead dipped to 3.1% from 3.2%. Although expectations remain elevated, they ought to gradually converge with actual inflation in coming months.

The rise in the US unemployment rate saw the market price an increased chance of a 25bp rate cut later this month. There is 22bp of easing implied from futures markets compared with 17bp ahead of the data. Treasury yields declined led by the front end of the curve. 2-year yields fell 4bp to 4.10% while 10-year yields dipped 2bp to 4.15%.

German 10-year bunds were little changed at 2.10%. Industrial production fell unexpectedly in October, led by contractions in the energy and automotive sectors, and is 4.5% weaker than a year ago. Despite ongoing political uncertainty in France, the 10-year spread against bunds closed at 77bp, well below the recent 90bp peak.

There was a brief period of FX volatility in the Asian session. The Korean won dropped sharply before recovering but suggests markets remain on edge given the political backdrop. The broader Asia FX complex slipped concurrently weighing on the NZD and AUD.

A broadly stronger US dollar overnight Friday saw NZD/USD fall below 0.5830. The NZD underperformed against the euro and yen which were only marginally weaker against the US dollar. The Canadian dollar underperformed, after unemployment increased to 6.8%, increasing the chance of a 50bp rate cut this week.

NZ fixed ended the local session on Friday modestly higher in yield with limited domestic or regional catalysts. 2-year swap rates closed 1bp higher at 3.59% and remain marginally above the lows from the past month. 10-year rates also increased 1bp to 3.99%.

Government bonds were similarly quiet with 10-year yields closing 2bp higher at 4.38%. Australian 10-year government bond futures are 2bp lower in yield terms since the local close on Friday, which suggests a marginal downward bias, for NZ yields on the open.

It is a quiet beginning to the week in terms of economic data. The only release of note is CPI and PPI data in China. CPI is expected to remain subdued, with the consensus estimate for a 0.5% annual gain, while producer prices also remain soft. With the private sector under pressure, stronger government stimulus is required to reduce deflationary risks. Chinese 10-year sovereign bonds have continued to move lower in yield and are now below 2.0%.

Looking ahead to the rest of the week, high frequency activity indicators will be the domestic focus with electronic card transactions and the manufacturing PMI scheduled. The focus in the US will be the November CPI which is the final first-tier data release ahead of the December FOMC. The European Central Bank, Bank of Canada and Swiss National Bank are all expected to cut rates. However, the RBA is expected to leave rates unchanged at its monetary policy meeting tomorrow and doesn’t release updated forecasts.