Market Insights Today: Hot U.S. jobs data; New BOJ governor chatter – 6 February 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) suffered from the double whammy of earnings disappointments and a surge in bond yields

Index futures traded south on Friday during Asian hours as Apple (AAPL:xnas), Alphabet (GOOGL:xnas), and Amazon (AMZN:xnas) reported disappointing results. The losses widened when New York came in following the staggeringly hot job data. The benchmark indices managed to pare all losses through New York mid-day but failed to hold onto gains towards the close. Nasdaq 100 and S&P 500 slid back down to finish the choppy Friday session 1.8% and 1% lower respectively. The sell-off in the afternoon was broad-based, seeing all 11 sectors within the S&P500 falling, led by weaknesses in consumer discretionary, communication services, utilities, and real estate. Apple recovered from an early loss to settle at 2.4% higher while Alphabet lost 2.8% and Amazon tumbled 8.5%. Nordstrom soared 24.8% following a report of activist investor Ryan Cohen having built a stake in the fashion retailer.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) jumped across the front end, paring rate cut expectations

Following the strong job data and a much better-than-expected ISM Services print, yields across the front end from the 2-year to 5-year Treasuries jumped around 18bps, bringing the 2-year to 4.29% and the 5-year to 3.66%. SOFR futures fully priced back a 25bp rate hike for the March FOMC and shed the rate cuts priced in for the 2^nd half of 2023 to 45.5bps from 56bps. In addition to the hot 517K headline for the January payrolls, non-farm payrolls were revised up by 51K on average from July through December 2022. The Household Survey showed employment growth of 894K in January, bringing the unemployment rate down to 3.4%, the lowest since 1969. While the deceleration in average hourly earnings growth to 0.3% M/M and 4.4% Y/Y, supports the Fed’s disinflation narrative and the likelihood of a pause after one more hike in March, the job data poured cold water on the market’s expectations of rate cuts this year. The reaction in the longer end was relatively less volatile. Yields on the 10-year rose 10bps and those on the 30-year finished the session 7bps cheaper.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) in consolidation mood

The Hang Seng Index declined 1.4% on Friday, extending the weekly loss to 4.5%. HSBC (00005:xhkg) slid 3% and Ping An Insurance (02318:xhkg) plunged 4.1%. Baidu (09888:xhkg), falling 4.6%, pulled back and pared some of its strong recent gains. Chinese real estate names declined, led by Country Garden Services (06098:xhkg) down 7.25%, while local Hong Kong developers gained following Hong Kong scrapped Covid-test requirements for mainland visitors. China internet and EV names were notable laggards. Southbound money was net outflow every day, for a total net outflow of USD 2.2 billion over the week. CSI300 was down nearly 1% on Friday with real estate, solar, electric equipment, non-ferrous metals, and construction materials leading the fall. Friday was the first time that there was a daily net outflow in Northbound money via Stock Connect since January 3 this year. Over the week, CSI300 inched down 1% and northbound inflows into A-shares amounted to USD 5.1 billion in total. On Friday, economic data were better than expected but they took a backseat to the risk-off sentiment and exhaustion after the Hang Seng Index advanced 10.4% and CSI300 climbed 7.4% in January. Mainland China’s Caixin Service PMI returned to the expansion territory at 52.9, well above the consensus of 51.0 and 48.0 in December 2022. Hong Kong’s PMI bounced to 51.2 in January from 49.6 in December and retail sales grew 1.1% in January while the street consensus and the prior month were expecting a decline.

FX: All eyes on JPY again; dollar bid on jobs, geopolitics and BOJ new governor chatter

The Japanese yen weakened on Friday after the US jobs report, along with the upside surprise in ISM services, brought the US 10yr yields up over 13bps and 2yr up 18bps. The weakness in the yen was further aggravated this morning in Asia after reports of BOJ deputy governor Amamiya being approached to be the new chief (read below). USD traders will have their eyes on Chair Powell’s speech and a host of other Fed speakers due in the week to assess if last week’s dovish stance is maintained even after the strong jobs and ISM services reports. NZDUSD testing support at 0.6300 after being the weakest on the G10 board on Friday, and AUDUSD testing 0.6900. GBPUSD broke below 1.2100 after being rejected at 1.2400 last week, and the GDP report this week could cause jitters as expectations of a delayed recession have kicked in. EURUSD below 1.0800 while USDCAD tests 1.3400.

Crude oil (CLG3 & LCOH3) prices weighed down by risk-off tone

A strong US jobs report on Friday sparked a risk-off tone after prospects of rate cuts this year continued to gain traction following the Fed meeting last week. This was exacerbated by concerns of rising inventories and weaker than expected demand in China. EU’s caps on Russian oil products kicked in over the weekend; 100/bbl for premium products, such as diesel, and USD 45/bbl for cheaper products, including fuel oil. Russian Energy Minister stated that there is no reason to sharply reduce output of Russian petroleum products because of the EU embargo, so little disruption to supplies can be expected. But OPEC’s supply cuts still keeps the market tight. WTI futures were slightly higher at $73.50 after slipping from $78 on Friday; while Brent found support at $80 for now.

Commodities; metals head south; breakfast commodities charge

The most strength is coming in breakfast plate commodities; orange juice, coffee, sugar, and soybeans, with prices mostly being supported by limited supply following the hurricanes last year. While wheat and lean hogs are lower. In metals, we’re seeing price weakness in commodities that have been benefiting from Chinese demand picking up. Iron ore, copper, and aluminium appear to be facing selling pressure, with investors and traders taking profits, awaiting more evidence of a pickup in activity in China. The higher US dollar is also acting as a catalyst to take profits. That said, longer term fundamentals in metal commodities supports higher prices over the longer term. Gold is also seeing a sharp pullback from its fresh cycle highs after the US dollar picked up strength (following that very strong US jobs report). That said, gold ETFs like GLD, have seen increased buying throughout the year. Click here for Ole Hansen’s commodity report.

Gold (XAUUSD) broke below $1900

Gold broke back below USD1,900/oz as the prospect of monetary loosening shrank following the strong jobs data. Further strength in the US dollar could continue to weigh on the yellow metal, but rising US-China tensions could provide a leg of support to the safe haven metal. With $1872 support also broken, traders could be watching the next support level at $1845.

What to consider?

US January jobs data to question the peak rates narrative

A shocking +517k gain in the US nonfarm payrolls on Friday vs. expectations of +188k, along with a net revision of +71k to the prior two months’ data, continued to suggest that labor market in the US remains far too tight despite abundant news of layoffs in January. Other aspects of the report were also robust. Unemployment rate saw a surprise fall again to 3.4% from 3.5% (exp. 3.6%), the lowest since 1969. Average hourly wage growth was unchanged at the 0.3% M/M pace, while the Y/Y fell to 4.4%, still less than the expected 4.3%, and the prior was upwardly revised to 4.8% from 4.6%. With market focusing on data more that what Fed Chair Powell said last week, this is likely to send some jitters as it questions the peak rates narrative for the Fed and took the 10year Treasury yields over 10bps higher on Friday.

Goldilocks US ISM services report for January

After the jobs report, ISM services also surprised on the upside on Friday. The index rose to 55.2 for January (vs. expected 50.4) from 49.2, in what was the biggest monthly gain since June 2020. Business activity accelerated to 60.4 (prev. 53.5, exp. 54.5). Employment lifted back into expansionary territory at 50.0 (prev. 49.4), and new orders surged higher to 60.4 (prev. 45.2). Moreover, the inflationary gauge of prices paid dipped a notch to 67.8 from 68.1, but still remained elevated by historical standards.

Caixin China PMI in expansion, the first time since September 2022

Caixin China PMI Services came in at 52.9 in January, 4.9 points higher than the December reading beating the median forecast of 51.0. It was back to the expansion territory for the first time since September last year. The output and new orders sub-indices were back into the expansion territory for the first time in five months. The new export orders subindex rose to the highest level since April 2021 and was back in the expansion territory. The employment sub-index, however, stayed in the contraction territory for the third month in a row.

Reports of Amamiya being approached to be the next BOJ Governor

Japan’s Nikkei reported that the government has approached Bank of Japan Deputy Gov. Masayoshi Amamiya as a possible successor to central bank chief Haruhiko Kuroda. The week was supposed to bring possible BOJ chief nominations, as the nominees list has to be presented to parliament on February 10. However, FM Suzuki refused to confirm Amamiya’s nomination. Amamiya has helped Kuroda since 2013 on monetary policies, and is considered the most dovish among the contenders, which is thrashing hopes that BOJ policy normalization could progress under the new chief.

US-China tensions heightened over the Chinese surveillance balloon incident

The Chinese surveillance balloon floating over the U.S. soil for multiple days was finally brought down by an American fighter jet on Saturday. Both sides exchanged accusations over the incident. Before that, the U.S. Secretary of State Anthony Blinken announced on Friday that he was postponing his trip to China.