Weak US NFP Report Will Not Trigger A Fed Tapering Discussion

Market movers today

  • A quiet start for the week in terms of economic data, Norwegian inflation figures will be released for April and later in the day, Norway will announce the decision on the future use of AstraZeneca and Johnson & Johnson vaccines in its vaccine program. Fed’s Evans will discuss the economic outlook in the evening.

  • Later in the week, markets will focus on US April CPI figures, which are still distorted by base effects. German ZEW expectations for May on Tuesday should still paint a constructive picture of the recovery. ECB minutes on Friday should not bring much new information as the April meeting has relatively uneventful. US Retail Sales growth (released on Friday) is expected to decline as March figures were boosted by the latest round of stimulus checks. Finally, we have a range of Fed speakers on the agenda throughout the week.

The 60-second overview

US labor market report: The non-farm payrolls figure on Friday disappointed market expectations. With an NFP of only +266k versus 1m expected it was significantly below expectations, but also the downward revisions of -78k in the two previous months was weak. As a result, the unemployment rate ticked higher but that is because the labor force participation rate is increasing (which is good). Average weekly hours was also up to 35.0 from 34.9. However, a weak report will not trigger a Fed tapering discussion near term. Notably, the fixed income market rallied 8bp on the weak report, however as the details were not as bad as first envisaged, the market sold off and ended virtually unchanged on the day. Fed’s Kashkari said that ‘We are still somewhere between 8 and 10 million jobs below where we were before the pandemic’.

Scottish election: The parliamentary elections in Scotland ended with a majority to the pro-independent parties. The SNP got 64 seats (of the 125 seats) and with the support of (also pro-independent) Greens’s 8 seats, the pressure for another independence referendum on Boris Johnson is high. That said, First minister Sturgeon and Johnson agree the most important issue near term is the COVID-19 situation.

Oil: The largest US fuel pipeline, Colonial Pipeline suffered a cyberattack on Friday shutting down its operations and is still not operational yet again. This adds to the already surging commodities. Oil ended the day broadly unchanged on the day at USD65/bbl.

Equities: Equities finished higher on Friday. The reflation narrative reversed as macro missed expectations which took back some of the value rotation leading up to the data release. This however fuelled the risk appetite and sent Dow and S&P to record closes. In total, Dow 0.7%, S&P 500 0.7%, Nasdaq 0.9%, Russell 2000 1.4%. Risk on with all sectors except consumer staples higher. Even VIX dropped back to a week-low. Energy the best performer, along with industrials and tech. The risk appetite lingers in Asia as well with most markets higher. US futures point to a positive start to the week.

FI: Friday saw a sharp intraday reaction to the US labor market report. As the headline figures were a massive disappointment with approx.. 750k below expectations, the US treasury market rallied some 8bp, leading the global rates alongside. However, as markets digested that the labor market report was not as bad as the headlines suggested (but still weak), the market sold off again and ended virtually unchanged on the day. EGB spreads remain under pressure with most of the ‘Draghi-trade’ being unwound leaving the Italian-German spread at 118bp.

FX: EUR/USD moved higher the jobs report miss on Friday. We expect the cross to stay above 1.20 near-term. No big GBP reaction after the pro-independence parties secured the majority in last week’s Scottish Parliament election.

Credit: Credit markets were in a good mood on Friday where iTraxx Xover tightened 3bp (to 251bp) and Main 1bp (to 50bp). HY bonds ended 1bp tighter and IG unchanged.

Nordic macro and markets:

Today we get Danish CPI inflation for April. We expect inflation to increase to 1.1% from 1.0% in March. Base effects after last years’ huge oil price decline in April are the key contributing factor. The big joker is whether the summer sale in clothing has come early this year in the wake of reopening as we have to some extent imbedded into our forecast. If this is not the case, we could be looking at a print between 1.2 and 1.3% instead. Airfares will weigh on inflation this month as the imputed price will increase significantly but with a much lower weight compared to last year. With the April prices, the PSO tariff on electricity is once and for all phased out and will thus no longer weigh further on inflation going forward.

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