Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Patience required after an NFP miss for the ages.
John J. Hardy
Chief Macro Strategist
Summary: One month of weak payrolls does not a weak trend make, but the US April payrolls change release was a horrific miss relative to expectations and offers USD bears about as much support as they could expect, with the very important caveat that the kneejerk reaction to the data is maintained: lower US yields with a strong boost to speculative assets on the anticipation that Fed is sidelined and more stimmy checks are on the way down the line.
FX Trading focus: patience required, especially if initial reaction in US treasuries to massive NFP miss fades
A horrible US data miss leads to maximum risk on for the most speculative assets and a weaker USD – that’s the kneejerk reaction in the modern era of maximum central bank and now fiscal support at every misstep for the economy, especially when rising long rates has recently become the latest bogey-man. But as of this writing I am watching the most important of the reaction variables: US treasuries and whether the spike is maintained. If the long yield reverts back higher to where it came from at the start of the day, the reaction elsewhere could be quickly unwound, particularly in risk sentiment-linked FX and even the US dollar broadly. So important to exercise some patience here.
A short update today as I wanted to see the US jobs report release and the market reaction for a few minutes before drumming up any fresh thoughts: we just witnessed one of the biggest macro data misses in recent memory, and at a very interesting juncture, amidst talk of overheating prices (breakevens gone wild this week, etc.) and concerns that the US economy is set to get white-hot as stimulus works its way through the economy and Covid lockdowns end. Instead, we got a +266k payrolls change number for April versus the even 1 million consensus expected and saw a -78k revision to the prior two months payrolls numbers, with the March number revised an ugly -146k to 770k. Important to note that the “household” survey didn’t confirm the ugly numbers (nor have weekly claims and the ISM employment sub-indices), as the participation rate rose 0.2% but the unemployment rate rose only 0.1% (i.e., more people out seeking work is a good thing and the rise in the unemployment rate doesn’t show a deterioration if the participation rate rises more.
It is always important to note that there is incredible statistical massaging in the creation of this NFP number every month and that it is produced with a raft of built in assumptions that are probably less accurate than ever due to the unprecedented nature of the economy since the pandemic outbreak, so despite the magnitude of the miss and the powerful market reaction, it will be helpful to wait for the closing levels today for the overall lay of the land in the wake of this release, using the US treasury market as the primary focus (as noted in the initial paragraph above.)
Chart: EURUSD
EURUSD rushed to the top of the range on a very weak US dollar and lower US yields in the knee-jerk reaction to the US data release today. A close today near the recent top well above 1.2100 would be just what the bulls ordered for a follow-up assault on the highs in the coming couple of weeks, but a bad reversal today back well below 1.2100 after this run-up as US yields revert back to the pre-jobs report level would on the other hand prove tactically bearish and keep the chart in near-term limbo.
Table: FX Board of G-10+CNH trend evolution and strength
Note the CAD relative performance was weak today (CAD down on weak US and weak CA jobs numbers) as the weaker US jobs numbers have helped further pressure crude oil prices today and the reaction has supported interest rate sensitive FX like JPY, EUR and SEK (CHF confusing us lately – will follow up depending on how the 1.0900-1.1000 area behaves in EURCHF next week). I suspect that in broad terms, CAD could risk a consolidation here in the crosses.
Table: FX Board Trend Scoreboard for individual pairs
Presenting a snapshot of where things are before the close of the day – will need to see if the moves hold into the close – one worth pointing out is EURSEK trying to cross-over to the downside again- will need to see follow through below 10.10 next week as the huge level there is 10.00, with strong risk sentiment needed for a significant move below that level.
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