NFP did surprise, completing a week of whipsaw data – softer than expected GDP report followed by very strong employment data. However, the bigger surprise was the dollar weakening despite crushing many expectations. In the end the unemployment headlines being stronger has not been enough to change the tune that capital markets have been playing for sometime. If anything, it confirms that the weather-related bounce back is happening. The key to the “buck's” weakness lies with the Fed. It's going to take some time to gauge the underlying performance of the economy – buying Yellen and company more time and with wage inflation so tame, there is no reason for them to change their “lower for longer” message. With Q3 on the table the dollar has problems.
The boost to market sentiment provided by NFP has not lasted very long. Global equities start the holiday-impeded week on the back foot, as investors digest the latest sign of weakness from China's manufacturing sector. Investors are also keeping an eye on the spreading conflict in the Ukraine. With London on a public holiday trading was always going to be somewhat subdued. Nonetheless, a disappointing Chinese HSBC manufacturing PMI is not helping (April 48.1 vs. 48.3). This morning's print continues to defy the steadying trend in official stats, however, not all is bad news. Despite the final headline be downgraded, there were signs of stabilization in total orders and production, with both indices rising month-over-month for the first time in 12-months. This tidbit of positivity would suggest that Beijing's mini-support measures are helping to prevent a steeper downturn to Chinese GDP.
The accumulations of various geo-political concerns and economic disappointments have safe-haven assets again in demand. Bunds and US treasuries, which had dipped briefly following US payrolls report but quickly recovered, have managed to inch even higher this Monday as the market heads stateside. Even yen is trading sub ¥102, while commodities – especially gold – has found some of its long lost support striding towards $1,315 in the late euro-session.
Similar to the US yield curve, the 2′s/10 German bund spread is just holding above its +131bps low. The curve is certainly flatter after last week's high print of +135bps. The market expects stop losses to be an issue on a break of this lower level. However, there is an outside chance of a full return to the +115bps low from 12-months ago. The difficulty, as with its transatlantic counterparty, has to do with demand. US treasuries and bunds require a fresh bout of bullish sentiment, which is difficult at such low yields – the 10-year bund are currently straddling +1.45% and eyeing +1.40%, while it's US counterparty is trading at +2.58%.
From a currency perspective, the forex market tune sound very similar. There are no surprises with the EUR again trading steady early Monday morning. However to many, the technicals indicate a strong likelihood the 18-member single currency will rally versus its US counterpart this week. The EUR is suppose to be firmly supported by the Bollinger upward channels on both the daily and weekly charts – at €1.3685 and €1.3861 respectively. This would suggest to any EUR bull that buying the single currency on dips is the way forward in the short-term. However, through these support levels expect many ‘long' positions to begin seeking the exit. The EUR uptrend should continue to guide the bulls towards that psychological €1.4000 channel – a level where the ECB is expected by many to become more “vocal.” For the time being, the “trend remains your friend.”
Other highlight this week will be the Aussie rate decision on Tuesday, where no change is expected. The RBA is expected to monitor the jobs numbers even among signs that the economy is picking up. On Wednesday Ms. Yellen testifies to the US joint Economic committee on the “Economic Outlook.” Having avoided a press conference at last weeks FOMC meeting and mostly skipping monetary policy themes in a speech on Thursday, the Fed head may be forced to clarify her thoughts on the economy. The market will be looking for anything in reference to last week's supposedly strong jobs report.
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