Payrolls way over forecasts upset a lot of apples carts

Retail sales were not a dud as reported everywhere, nor was nonfarm payrolls. Payrolls way over forecasts upset a Lot of apples carts. Most reports have it that yields fell on the news but it’s likely the stock market woes get the credit, too.

As everyone knows by now, labor market data is terrible—it’s noisy, it gets revised, and it shouldn’t be the basis for any financial market trading. Blooberg’s Authers points out “Futures are still pricing in two cuts for the full year, but it’s questionable whether that is a fair bet. The available workforce is smaller than it used to be, thanks to demographics. The ratio of those in employment to the entire population is unimpressive. But repeating that exercise for those in the prime working ages of 25 to 54 yields a very different outcome. For all practical purposes, the US appears to be close to full employment.”

As for the 10-year auction, it attracted below average demand. The Treasury sold $42 billion at a high yield of 4.177 percent and a bid-to-cover ratio of 2.39. The month before, the 10-year bid-to-cover was 2.55 and the yield a bit lower at 4.173%. RTT News reports “The ten previous ten-year note auctions had an average bid-to-cover ratio of 2.54.”

Separately, the WSJ has a story on corporate bonds being gobbled up by the boatload by investors so that the spread with Treasuries keeps contracting (but is still positive and a competitor with Treasuries).

Also, some reports have it that the probability of a Fed rate cut got moved out from June to July, but as of this morning, that may be the case by some measures but not the CME FedWatch.

The CME FedWatch tool has a 49.3% probability of a cut in June, exactly the same as a week ago and up rom 47.0% the day before. As for July, the probability of a cut is 45.5%, flat on the day and up from 40.9% a week ago.

Finally, only the most diligent of conservatives worry about the deficit these days. Reuters notes “ If the labor market has stabilized, that allows the Fed to focus on its inflation mandate and it's still well above target there. Friday’s CPI report now takes centre stage.

“What stabilization doesn't do is support Donald Trump's view that America should have the lowest borrowing rates in the world.

“And the release of the CBO's latest 10-year budget and debt outlook shows why U.S. Treasury borrowing costs are not the lowest in the world. The nonpartisan organization expects the cumulative 10-year deficit to be some $1.4 trillion, or 6%, higher than projected in January 2025. It also forecasts the debt-to-GDP ratio topping its 1946 peak of 106% in 2030.”

As long as the US can still print dollars and peddle bonds, the less righteous can ignore this scream of danger. But history says that like other hegemons before the US, overspending can kill an empire. Remember Spain and all its wealth stolen from the Americas—gone, and Spain all but a third world country within 100 years.

Japan

Note that the dollar index fell a lot more than the tepid euro would suggest. That’s because while the euro makes up the biggest slice of the index (57.6%), the yen is 13.6% and it is still soaring.

Overnight we got Japan's wholesale inflation for Jan, down for the second month and expected to fall further, reflecting the earlier weak yen.  Reuters: “The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.3% in January from a year earlier, data showed on Thursday. That matched a median market forecast and slowed from a 2.4% gain in December.

“ … The yen rebounded in recent sessions but its persistent weakness has been among factors pushing up inflation by boosting the cost of importing fuel and raw materials.” The BoJ will look at wholesale prices, which do lead consumer prices in Japan. Consumer inflation remains above the 2% target for almost 4 years now, but as Reuters point out, it’s not inflation determining the rate hike trajectory, but it’s likely the yen moves. Analysts may holler that the BoJ is behind the curve, but it has been deaf to that for a long time. The yen is another matter.

At a guess, the dollar/yen can re-test the recent low around 152, if not in a straight line, and in some measure, lead the pack.

Forecast

The zigzag in the dollar yesterday was very upsetting to those long euros and even the pound. The narrative went back to “not even Trump can wreck the US economy resilience and robustness.” But second thoughts are quick to arrive—yes, he can. Wages may not be rising as fast as they were, but the labor market is strained and there really is a skilled labor shortage, egged on by anti-immigration activities plus the demographics.

The tariffs are a drag. The deficit is a drag. The uncertainty over what stupid thing Trump will do next is a drag, as the Bank of Canada council points out. It looks like Warsh will be a reasonable Fed chairman, but that independence issue is not resolved. And so on. Bottom line, there are eleventy-seven reasons to sell dollars and only one to buy dollars—yields better than most others of any important size.

Therefore, we expect the dollar rout to gain traction again, but be careful.