Markets ignored an ambiguous US labour report – weekly update 12 March

A look back over macroeconomic and market events for the week ending 9 March 2018. Markets largely ignored an ambiguous US labour report, with equities drifting higher as other asset classes range traded. US CPI inflation will be closely watched this week and there is a range of mid-ranking data and ongoing political activity for investors to keep an eye on.

Strong US labour activity for February

The US employment report showed strong labour activity for February, though wages were somewhat below expectations. 313,000 jobs were added in February, well ahead of the 205,000 forecast and broadly based, while the two previous months’ readings were revised up by a total of 54,000. Unemployment remained unchanged at 4.1% (a dip to 4.0% had been forecast), but that is not surprising with the Participation Ratio rising 0.3% to 63.0%.

Against these, average hourly earnings growth of 2.6% year on year (yoy) was well below the 2.8% forecast, with the surprise reading from January revised down 0.1% to a still potent 2.8%. The ambiguous report was largely ignored by the market, but nonetheless reaffirms the continued underlying strength in the US economy.

European Central Bank’s official communication becomes more hawkish

The European Central Bank (ECB) shifted its official communication to a more hawkish stance but, as we’re now used to, this hawkish move was offset by a relatively dovish press conference. Although monetary policy was left unchanged, in the associated statement a line explicitly discussing extending the asset purchase programme if conditions deteriorated was omitted – a subtle but now well-signposted signal.

This was largely as expected after minutes from previous meetings suggested a change of messaging was on the way, so markets were relatively unperturbed overall. This latest development is consistent with the ECB allowing quantitative easing (QE) to end in the final quarter of this year.

Other updates from Central banks

Elsewhere, the Bank of Japan left monetary policy unchanged. Overall, there were no big surprises from Central Banks last week. There was a clear continuation of the gradual withdrawal of ultra-loose monetary policy, although monetary conditions are likely to remain supportive for the foreseeable future.

President Trump’s trade tariffs on steel and aluminium

US President Donald Trump signed the order to implement trade tariffs on steel and aluminium that take effect 15 days from signing, though there were last minute exemptions. While markets seem to have been interpreting these exemptions as a softening of the approach, they are only temporary, and they are currently only for Mexico and Canada while the NAFTA trade talks are ongoing. So potentially these exemptions are more about creating leverage than being friendly.

Europe is also looking for clarification as to whether it will be exempted as an ally and officials in the EU have already been very vocal about potential retaliatory action including tariffs on Harley Davidson motorcycles and bourbon as well as orange juice, Levi jeans and peanut butter. With President’s Trump Chief Economic Advisor Gary Cohn quitting last week, the likelihood of a more protectionist US is growing. It wasn’t all bad though, as President Trump also agreed to meet Kim Jong Un in a move that could significantly cool geopolitical tensions on the Korean peninsula.

Last week’s other events

• The UK Services PMI rose from 53.0 to 54.5 (53.3 was expected). Industrial production grew 1.6% yoy in January from flat in December, below the 1.9% forecast. Construction output was a big disappointment, falling further than expected from -0.2% to -3.9% (-1.0% was expected)
• Chinese CPI inflation surged to 2.9% yoy in February from 1.5% in January and ahead of the 2.5% forecast. Export growth also jumped, up 44.5% on a year earlier, from 11.1% (11.0% expected), while import growth slumped from 36.9% to 6.3% (8.0% expected). Caixin services PMI slipped from 54.7 to 54.2 (54.3 expected). The National People’s Congress also approved the abolition of presidential term limits, allowing the current President Xi Jinping to stay on indefinitely
• Japan’s Services PMI dipped from 51.9 to 51.7 as the Coincident Index fell from 120.2 to 114.0 (115.3 expected) and the leading index was down from 107.4 to 104.8 (106.5). This was coherent with the eco watchers surveys, where the current survey slipped from 49.9 to 48.6 (50.5 expected) and the outlook survey was down from 52.4 to 51.4 (51.7 expected)

The markets

It was back to business as usual last week with no major events or disruptions, allowing equities to drift higher with other asset classes relatively subdued.

Equities

Equity markets regained their poise last week, led by the US where the S&P 500 gained 3.6%. Europe was just behind as the MSCI Europe (Ex-UK) returned 3.3% and the MSCI United Kingdom rose 2.5%. Japan lagged with the TOPIX eking out 0.4% for the week, while the MSCI emerging markets index returned 1.8%.

Bonds

Core sovereign bond yields were fairly quiet again last week. US 10-year Treasuries rose 4 basis points (bps) on Friday to close at 2.89% (3 bps higher than they started the week). 10-year UK gilt yields were 2 bps up on the week to close at 1.49% and the equivalent German bund yields were unchanged at 0.65%.

Commodities

Oil continued to range trade in the mid-60s with Brent crude oil finishing Friday at US$65.49 per barrel. Copper was a sliver higher at US$3.12 per lb and gold was essentially unchanged at US$1,324 per ounce.

Currencies

Sterling regained some strength last week and was the main mover. Sterling finished at US$1.39, €1.13 and ¥148 on Friday.

The week ahead

There are a few points to look forward to this week. Tuesday’s US CPI print will be relevant as markets remain alert to any signs of inflation picking up, with forecasts for an increase from 2.1% to 2.2% yoy. Early on Wednesday morning, China releases its latest batch of data including Retail Sales, industrial production and fixed-asset investment (details below) with Eurozone industrial production for January released later Wednesday morning, expected to remain strong at 4.7% yoy (from 5.2%). We then have US Retail Sales on Wednesday afternoon, which the market expects to have rebounded from -0.3% month on month in January to 0.3% growth for February. Away from the data, there is also an ECB conference on Wednesday with some key speakers including ECB President Mario Draghi, and the continuing National People’s Congress in China which could both generate talking points. The daily breakdown is as follows:

Monday: A quiet start to the week. Japan reports machine-tool orders in the morning, followed by PPI ‘factory gate’ pricing late in the evening.

Tuesday: Aside from US CPI, the US National Federation of Independent Business (NFIB) Small Business Optimism Index will be reported and real average earnings. Late in the evening, Japan’s core machine orders are reported.

Wednesday: The busiest day of the week, China’s data release will include year-to-date Retail Sales (10.0% yoy expected from 10.2%), industrial production (6.2% from 6.6% expected) and fixed-asset investment (7.0% from 7.2% expected). After the Eurozone industrial production and US Retail Sales readings, the US will also release its latest PPI numbers.

Thursday: There’s a reasonable amount of data out from the US in the afternoon, including the Empire State manufacturing gauge, import and export prices, the Philadelphia Federal Reserve Business Outlook and the Bloomberg Consumer Comfort report.

Friday: A relatively quiet end to the week, with US industrial production and sentiment surveys from the University of Michigan the only releases of note.