Jackson Hole: the lowdown on labour markets

FX

Fed Chair Yellen’s speech at the Kansas City Fed’s annual Jackson Hole symposium will be the main event today, although it is also worth bearing in mind that ECB President Draghi speaks later in the day. The title of Yellen’s speech is simply ‘Labour markets’. As underscored by Wednesday release of FOMC minutes, this seems to be one of the main issues vexing the Fed at the moment, which means that her speech is likely to interest the market. The minutes of the 29 to 30 July FOMC meeting showed that while the Committee generally agreed that “labour market conditions had moved noticeably closer to those viewed as normal in the longer run”, there was a difference of opinion regarding the extent of the remaining slack in the labour market, as well as how to appropriately measure this slack. The question is whether Yellen’s speech will give the market any clearer guide to the Fed’s thinking about the likely timing of “liftoff” (rate hikes), or whether it will be more of an academic speech that really just lists the issues surrounding the labour market with little indication as to how this is impacting on the Fed’s decision-making at the moment. Steve Barrow, our G10 FIC Strategist, thinks that the market suspects it will be the latter, but he points out that there have clearly been occasions in the past when comments from Fed leaders at the Jackson Hole conference have had a meaningful impact on the market. The market will thus be watching the speech closely, but Steve thinks that the chances of it moving the markets significantly are limited.

Later in the day, ECB President Draghi also speaks on the topic of labour markets. His speech is entitled ‘Re-evaluating labour market dynamics’. Here, too, Steve suspects that Draghi won’t talk much about monetary policy. He will probably stress some of the headwinds that face the Eurozone, like the future ageing of the population, alongside the positives, such as structural reforms aimed at lifting productivity in the region, that are taking place. In spite of dire problems, like massive youth unemployment in many countries, we suspect that Draghi will try to sound upbeat, so as to not give away any clues that the Bank is considering easing policy further at this stage. In all, Steve doesn’t see the market responding, with the late timing of the speech (for the European markets) clearly an issue as well.

August German preliminary PMI data came in lower than July readings for both manufacturing and services, but were above consensus forecasts. The manufacturing survey fell to 52.0 from 52.4, and services slipped to 56.4 from 56.7. This suggests that the slump in the ZEW survey last week was a bit of an exaggerated response to the situation in Russia. Steve notes that we often find that the ZEW survey moves much more dramatically than the other surveys. This being said, the PMI is still consistent with meagre growth. Not too surprisingly, the flash Eurozone manufacturing PMI came in below the consensus at 50.8 and compared with a score of 51.8 in July, with services down to 53.5 from 54.2.

Note: Next Monday (25 August) markets in the UK will be closed for a bank holiday.

The rand strengthened against the US dollar yesterday after four consecutive trading days of weakness, closing at USDZAR10.71, compared with Wednesday’s close of USDZAR10.74. The rand appreciated into a mixed performance from the dollar against the major crosses, and into broad-based strength among commodity and EM currencies. The dollar strengthened against the pound and the yen, while weakening against the euro. The rand appreciated against all of the major crosses, with the biggest move seen against the pound (-0.4%). All of the commodity currencies we monitor for purposes of this report appreciated. All but two of the EM currencies we monitor appreciated on the day. The exceptions were the INR and the BRL, which depreciated. The rand took up the middle position in the commodity currencies category and sat just above the halfway mark in the EM currencies category (beaten only by the TRY, the HUF and the RUB). The rand traded between a low of USDZAR10.6582 and a high of USDZAR10.7509 yesterday. Support from where the rand opened this morning sits at 10.7160, 10.6600, 10.6000 and 10.5250. Resistance levels sit at 10.7600, 10.7910, 10.8350 and 10.9400.

Turning to commodity prices, copper and Brent rose by 0.3% and 0.1% respectively. Gold and platinum fell by 1.2% and 0.6% respectively. The ALSI was more of less unchanged, while the EM MSCI fell by 0.3% on the day. The EMBI spread widened by 3 bps, while the SA CDS 5yr spread compressed by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, edged down by 0.2%.

Non-residents were marginal net buyers of local equities (ZAR70 million) and were mild net buyers of local bonds (ZAR291 million) yesterday. Buying of bonds was seen in the 12+ (ZAR243 million), 7-12 (ZAR172 million) and 3-7 (ZAR64 million) year buckets. Selling was meanwhile seen in the 1-3 (-ZAR188 million) year segment. Bond yields fell by between 3 bps (R203, R208 and R186) and 5 bps (R214) on the day. The 6x9 and 12x15 FRAs fell by 1 bp and 2 bps, respectively, while the 3x6 FRA rose by 4 bps.

FI

There is no major data releases today and the currency traded relatively stable over night. This suggests bonds should start on the front foot this morning. Attention will turn to the US in late afternoon, when Janet Yellen talks on labour markets at the Jackson Hole summit. Any talk around a large amount of slack in the labour markets would be perceived as dovish for policy and likely see local assets rally.

At today’s government ILB auction, NT is planning to raise up to ZAR800m across the I2025, I2038 and R212. Market participants were eligible to take up 100% of their allocations in the R2032 and the R2044 at yesterday’s non-competitive bond auction, while buyers in the R2037 were still only eligible to make use of a 50% non-competitive auction level. This saw a 100% take up in the R2044, which raised an additional ZAR500m, while the R2032 raised an additional ZAR700m representing 70% of the funds raised on Tuesday, while the full 50% allowable limit was raised in the R2037 (ZAR426m).

Turnover remains low in SA bonds. Wednesday recorded another low-teens turnover day, with only ZAR13.6bn of trade in nominal SAGBs recorded. What was surprising, is the low contribution of the R186, accounting for only 12.8% of the market. Considering the benchmark bond traditionally is 30+% of the market, it is extremely low. Other bonds did pick up some of the trading slack, with the R2037 (11.2%), R2032 (11.0%), R2023 (10.7%) and R2044 (10.4%) each accounting more individually for more than 10% of the turnover. However, with the R2032, R2037 and R2044 being this week’s auction stock, it suggests almost a third of yesterday’s turnover was due to taking up of non-competitive auction allocations.

Bonds rallied yesterday across the curve, led by the R209 through R2048 bonds, which moved 4.5 – 5.0 bps. The R186 rallied by 3 bps, resulting in the front and belly spreads remaining unchanged and the back-end bull flatten by 2 bps. FRAs followed the bonds and currency, coming in by several bps. Breakeven yields have seen a little bit of downward pressure lately, with 10yr breaking below 6.30%. Non-residents were net buyers of nominal SAGBs yesterday for a total of +ZAR291m. Foreign buying was recorded across the curve, with the exception of the 1-3 year segment, which recorded net selling of -ZAR188mm in the R157 on the day. Foreigners purchased +ZAR243m in the 12+ year segment, with notable inflows recorded in the R2032 (+ZAR220m), R2037 (+ZAR197m) and R2044 (+ZAR94m); this was partially offset by net selling in the R213 (-ZAR230m) and R2048 (-ZAR108m) in this category. Foreigners purchased +ZAR172m in the R2023 in the 7-12 year segment. In the 3-7 year maturity category, notable inflows into the R204 (+ZAR292m) and R208 (+ZAR111m) were offset by net foreign selling in the R207 (-ZAR293m).

Following the weakening of the US FI market on the back of the Federal Reserve’s FOMC meeting minutes on Wednesday, USTs strengthened yesterday. The yield on the 2yr UST fell by 0.41 of a bp to 0.47%, while the yield on the 5yr UST remained unchanged on the day, at a yield of 1.63%. The yield on the 10yr UST fell by 1.96 bps to 2.41%. At the longer-end, the yield on the 30yr note fell by the largest increment, of 3.21 bps, to 3.19%.

EM FI markets weakened on balance yesterday, despite recording notable moves, both weaker and stronger in the individual markets that we monitor for the purposes of our reports. 5yr yields rose by close to 1.00 bp on average, while 10yr yields rose by just over 1.00 bp on average. SA’s FI market strengthened on balance, with the 5yr note falling by 3.70 bps (recording the second best performance), and the 10yr note falling by 3.60 bps (recording the third best performance). Russia’s FI market recorded the best performance relative to the EMs we cover, with the yield declining by 5.27 bps, and Turkey recorded the best performance in the 10yr space, with the yield falling by 5.00 bps. In the 10yr space, Russia’s note declined by the second largest increment of 4.78 bps. In contrast, Brazil’s 10yr note recorded the worst performance, with the note rising by 16.00 bps, while Turkey’s 5yr note recorded the worst performance in the shorter-dated space, rising by 9.00 bps. FI markets in Mexico, India and Thailand weakened overall yesterday.

All EM currencies strengthened yesterday, following a widespread selloff on the back of the release of the Fed’s FOMC meeting minutes the day before. The Russian ruble led the moves stronger, appreciating by 0.60% on the day. The SA rand appreciated by 0.28% yesterday. Other EM currencies to appreciate on the day, were the Hungarian forint (0.37%), Turkish lira (0.30%), Polish zloty (0.23%), Mexican peso (0.21%), Indonesian rupiah (0.10%) and Thai bhat (0.09%).

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