Weekly Market Update: June 7th 2016

Market Recap

Global equity markets ended the week on a sour note as market participants were caught off guard by much weaker than expected monthly US jobs data from the Bureau of Labour Statistics. The sharp response across equity, bond and currency markets on the back of one report is a reminder of the lack of conviction among market participants on the true state of the fundamentals underpinning the global economy. Most of the major equity indices ended the week lower (China bucked the trend), government bond yields fell and the Euro strengthened as markets moved to risk-off mode. The German government 10-year bond yield closed the week down 7bps at 0.07%.  

ECB Meeting: The European Central Bank’s governing council met in Vienna last week with no change in monetary policy announced. Their forecasted rate of inflation for 2016 was upgraded slightly, from +0.1% to 0.2%, a long way from their 2% mandate.

OPEC Meeting: Vienna also welcomed officials from OPEC. The 169^th meeting of the organisation concluded no change in production was warranted, noting that the recent rebound in prices reflected “supply and demand converging” and that “the market is moving through the balancing process”.

Japan Sales Tax: Japan postponed next year’s planned sales tax increase – to 10% from the current 8% – to 2019. This is not the first time. Initially scheduled to take place in October 2015, it was postponed to April 2017.

US Fed Summer rate hike may be off the table…..

As I alluded to last week, the key US Employment Situation report released on Friday carried even more significance than usual with market participants caught in no man’s land on the timing of interest rate hikes from the all-powerful US Federal Reserve.

Over the last month implied market expectations of when the Fed will raise rates have moved erratically. We have gone from a situation where markets were pricing in almost zero chance of a June rate hike with little more than a flick of a coin on whether we would even see one rate hike in 2016, as global risks loomed, to a situation where everyone suddenly felt better about the global economy and were happy to hear the US Fed officials talking up the possibility of a summer rate hike.

However, the glass half-full optimists will be perturbed by the latest jobs report from the Bureau of Labour Statistics, with total nonfarm payroll employment increasing by 38,000 in May, significantly below the consensus estimate of 164,000. As well, there were downward revisions to previous months, the change in March was cut from +208,000 to +186,000, and from +160,000 to +123,000 in April. As a reminder, the consensus estimate before the April report was 200,000 nonfarm payroll jobs to be added.

The sharp move in markets following the report suggests many were caught off guard by the much weaker than expected US jobs report. The US dollar was weaker across the board on Friday. The Euro jumped +1.42% on Friday to $1.131, up against the US Dollar. Equity markets were in the red and the US 10-year treasury yield fell 10bps to 1.70%.

Week Ahead

Global equity markets bounced back yesterday from Friday’s sell-off with gains across most of the major indices. Oil prices continued to move higher on supply concerns.

On the macro front this week, the final estimate of first quarter GDP growth is published for the Eurozone on Tuesday. The consensus estimate is for the Eurozone economy to post quarterly GDP growth of 0.5%, above the previous quarter of 0.3%.

Employment data from the UK on Wednesday will provide an update on the labour market, a key determinant of the Bank of England’s monetary policy.

There are a raft of reports from Japan, including the final reading of second quarter GDP. There is trade data and inflation data due from China on Wednesday and Thursday, respectively.