A Big Sigh of Relief on the US Jobs Numbers

Global equity indices closed on a high note on the back of the Friday report. After a horrifying print in February, the U.S. labour market rebounded forcefully last month as the employment data showed the US economy added more jobs than expected in March but the disappointing wage growth, considering how tight the labour market is, continues to undermine the Feds effort to reflate the economy. But indeed, the Goldilocks economy should keep the economic bears at bay, at least over the short term. While the solid data print does walk back some domestic recessionary concerns, it doesn’t alleviate potential adverse knock-on effects from a possible worsening economic climate in China, Europe or even Brexit fallout.

But the improving economic landscape in China is bullish suggesting the global economy could catch a much-needed tailwind especially for the sickly manufacturing sectors in Europe that are mired in their worst slump since the 2013-14 recessionary lows. Indeed, the booming manufacturing scrim at the end of 2017 is all but a distant memory.

Frankly, I don’t find the NFP as a significant influence as much as I see the shifting economic tides in China a critical impulse.

While equity market revelled, the US dollar reaction was muted as US yields fell and bond curve flatteners were the flavour of the day as investors heaped into US bonds on the weaker than expected average hourly wages print which suggests the Feds will continue to remain on hold. While the strong NFP headline dispels thoughts of a Fed interest rate cut, the wage data dismisses any ideas of a rate hike suggesting equity markets will continue to edge forward on the dovish Fed outlook. But the big question investors now face is from Economics 101: As we reach full employment, hiring gains will likely cool but will it be enough to trigger a Fed ease?

FOMC Minutes

We expect the minutes to provide a good window into the Federal Reserve Boards mindset amid their strenuous effort to find harmony and strike a balance between conflicting forces that are asymmetrically associated with the pillars of the dual mandate. Ultimately, the markets will try to determine the Feds near, and medium-term reaction function while keeping in mind that policymakers views have a lot more to do with divergence from inflation targets than with builds or drops in the natural rates of employment.

But ultimately the markets will be looking for details why the Fed thinks it was appropriate to hold rates steady through 2019 and then resume rate hikes in 2020. Not the easiest of needles to thread as they must be uber careful not to send off any economic alarm bells, so we expect the Fed to explain their rate cycle recalibration in terms of inflationary shortcomings and little else.

Overall, we expect the FOMC minutes to steer the ship on a steady as she goes path.

Oil Markets

Hedge funds continued to pile into US crude future as bullish bets rose by more than 4 % last week according to the CFTC.

Our model suggested we had an optimistic set up entering last week, but we didn’t expect this much of a positive juice. However, our bets were helped along by but surprisingly positive economic data (PMI) out of China and the US which will continue to ease concerns of a potential threat to global oil demand. The PMI data is one of the best forward-looking indicators and last week numbers paint a very positive backdrop for oil prices.

Bullish signals continue to emanate based on last week price action even more so when traders quickly sidestepped the surprise US inventory builds, which only managed to slow not thwart this bullish oil rally.

The OPEC saga continues to support as the ongoing crisis in Venezuela shows little signs of abating. And Saudi Arabia continues to drive the bus with its ability to influence prices by tweaking domestic exports.

At $70 prompt Brent we believe OPEC supply cut compliance is fully priced in, but the market is now pivoting to escalating tensions n Libya, a possible slowdown in shale production and the nascent global economic recovery.

In Libya, OPEC’s persistent ‘rabble-rouser’ producer, political tensions could escalate and threaten oil production after the eastern regional military commander General Khalifa Haftar (LNA)ordered his forces to march on the capital, Tripoli, where the UN-backed government is based. With this critical OPEC oil producer on the fringe of a full-blown civil war, the potential for supply disruption is real. Given global supplies are tight it would not be out of the question to see prompt Brent overshoot to $ 75 per barrel if the eastern oil terminals which are currently under the LNA control come under fire from competing factions.

Traders have been focusing on non -OPEC supply growth and Shale Oil ability to respond to rising prices. However, a possible slowdown in US domestic production as its been reported by numerous inside sources that independent exploration and production companies are trimming spending as they focus on earnings growth instead of increased output.

The nascent global growth recovery is worth keeping an eye on but in a market starved for good news the fear is that asset prices start marching ahead of economic reality. But with the economic supply and demand function looking supportive we could see a significant near-term bounce on Libya supply disruption or news of a US-China trade agreement, both arguably unpredictable factor but pretty decent wagers in the overall all oil markets calculus

Also, the focus for the rest of April is veering towards the US decision on Iran sanctions waivers, which expire in early May. An extension of waivers has the potential for a time to assuage some of the pressure on global supply, but not to the extent necessary to offset renewed concerns on Libya and the crumbling situation in Venezuela. The bullish game plan remains in play.

Gold Markets

It was a mixed payroll report for markets, but Gold prices recovered slightly as Bulls took solace in a slower pace of US wage increases in March, which support the dovish market expectation of Fed policy through 2019. But ultimately the wild card remains the US-China trade negotiations, as its expected equity markets will spike, denting near term gold appeal, if news of an agreement is signed.

Gold ETF continues to see outflows as investors look to take advantage of improving risk sentiment driven on the back of US-China trade optimism. But the stronger-than-expected March readings of the manufacturing PMI in the US and China have subdued fears that the end of the global expansion was approaching fast which may further reverse out more bearish views on dovish central bank policy.

Currency Markets

I thought I was much more optimistic than the market when it comes to trader’s reaction to a US-China trade deal, but after chatting with my colleagues in Tokyo and Singapore over the weekend, it seems everyone is more optimistic than me and by a wide margin!! So now I am suggesting that we could see an even more significant bounce in risk sentiment on the day before “mean reversion” over the ensuing 24 hours. Assuming we do get a trade deal.

Weeding out all the distraction including Presidents Trump who is now calling for a rate cut and everything else just short of helicopter drops, trading currency markets is no less certain today than it was a month ago after the Federal Reserve Board and the ECB squeezed every drop of volatility out of the markets by their dovish shifts.

But there are so many mixed signals to deal with that suggest no one wants to get stuck looking to pass the hot potato on a US-China trade deal or Brexit kerfuffle.

But ultimately the central banks are still on hold and flows will flock to carry, which in G-10 will keep the dollar downside in check.

The Euro

The ECB is widely expected to remain on hold at its April meeting, and no one is expecting any fresh policy insights. I’m sitting in the March 2020 rate hike camp with everyone else but waiting for a consistent signal for improving EU data which will support Bund yields higher and tow the EURO along for the ride. Until then I expect the EURUSD slumber feast to continue.

Aussie and Kiwi

Traders will be keying in Debelle this week to shed some light on the RBA dovish tack, but with a big China economic calendar over the next two weeks, this will be key for the Aussie and Kiwi as much as it will be the key driver for the global reflationary theme. While to the extent the imminent US-China trade deal is priced in or not, it’s ultimately the comprehensive global growth narrative that will drive the Aussie and Kiwi fortunes given their critical roles in the global supply chains.

Malaysian Ringgit

Much of the current debate is centering around the BNM, but some factors that were contributing to some elements of dovish bias are gradually being alleviated.

Oil prices (prompt Brent) is trading above the key $ 70, and we could see a significant bound in prices on a US-China trade deal. Also, a US-China trade deal would likely bolster Palm oil prices and be incredibly supportive of the shrinking current account balance.

On a trade deal, the USD haven status should diminish, but with the dovish global central banks firmly on hold, the US still offers the best G-10 carry although we could expect more supportive carry flows.

However, some negatives do linger concerning the tepid domestic inflation prints that do suggest the BNM has room to tweak monetary policy lower slightly.

However, ultimately the MYR should benefit from US-China trade agreement, and that should keep the Ringgit in check over the short term.

This article was written by Stephen Innes, Head of Trading and Market Strategy at SPI Asset Management