US equities were weaker Monday, S&P down a further 0.6% heading into the close and US 10yr yields up another 10bps to 3.63%, 2yrs up 15bps. The moves were an extension of the post-payrolls moves seen Friday as the market gears up for more Fed hikes.
Indeed, we are starting the week off on a lower note as markets continue to digest last week’s strong Payrolls report and the ensuing higher rates environment.
Friday’s strong payrolls report continues to impact bond markets, and negatively for risk where yields on 10-year US Treasuries had jumped up to 25bp since just before the Payrolls report was released. A quarter-point rate increase is unquestionably pressuring already stretched US stock valuation overnight.
And while news of a more robust labour market — and its resulting potential implications for wage inflation — is causing investors to price in a higher rates environment, this same news also paints a brighter picture of the US economy. So bright that the market feels it’s painting too good of an image, especially given the divergent policy view between the market and the Fed. Hence ” good news” could become ” bad news” again as strong US labour market data is challenging the market’s increasingly dovish central bank lean.
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A soft landing is not necessarily an economic reacceleration. The continued strength in the labour market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably. But from a risk perspective, however, the flip side of a soft landing at high employment provides less wiggle room for a strong rebound and limits gains for Wall Streets Big Boards. Indeed this is a market that needs Goldilocks and no more.
Faced with the reality of a market that constantly jumps straight to cuts at the first sign of relief from energy prices on headline inflation. If jobs remain tight, it chokes off the one primary relief rally valve that supports risk-taking adventures. The market was much happier when the headline jobs data was trending south.
History shows there is no safe place to hide within global equities when the US equity market has a meaningful correction. So, investors of all stripes are pining for some hint of weaker US economic data to rekindle even a glimmer of those dovish expectations.
The oil market continues to bank on China’s demand while OPEC supply discipline provides the market with a backstop on deeper dips. However, the anticipated consumption increase in China is not the issue; higher Russian production and lower gas prices have roughly offset the more robust China demand this year. So for immediate concerns and in the wake of the new EU product cap, Russia remains the primary focus and whether the new cap will influence production lower.
With so much uncertainty about the direction of oil prices, the US economy, and monetary policy uncertainty back in the picture, most people prefer to sit on the fence and watch the ping-pong match unfold.
Traders will look for hints on RBA policy evolution, but China and equities will remain the main AUD drivers.
AUDUSD has been much more closely correlated to equities and commodities than rates in the past couple of years. Still, a follow-up hike in March could get fully priced if the RBA leans hawkish today and support the A$.
Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT