Stellar payrolls lift US yields

KBC Market Research Desk KBC Bank

Rates

Core bonds lost ground last Friday with US Treasuries significantly underperforming German Bunds following another stellar US payrolls report with 250k new jobs created (vs 200k expected). The unemployment rate stabilized at the 3.7% cycle low, but this occurred against an increase of the participation rate (62.9% from 62.7%). Weekly earnings rose by 0.2% M/M and 3.1% Y/Y as expected with the latter being the fastest wage growth on a yearly basis since early 2009. The US yield curve shifted 6 bps (2-yr) to 8.2 bps (10-yr) higher. The US 30-yr yield reached its highest level since 2014 (3.45%). US stock markets declined after the US payrolls as investors embrace the Fed's tightening goals with higher US real yields as a result. The US 10-yr real yield rose to 1.15%, a 7-yr high. Main US equity indices eventually lost 0.5% to 1%. Comments by US economic advisor Kudlow, who poured cold water on last week's US/China trade deal hopes, weighted as well. German yields added 0.5 bps (2-yr) to 2.9 bps (10-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps with Italy (-9bps) outperforming and Greece (+4 bps) underperforming. The peripheral bond rally (excl. Greece) accelerated after an MNI report saying the ECB is considering a fresh round of TLTRO's next year.

Asian stock markets follow WS lower with main indices losing 1% to 2%. Chinese PMI's disappoint with the Caixin Composite measure falling from 52.1 to 50.5, the weakest reading since mid-2016. The US Note future treads water. We expect a neutral opening for the Bund.

Today's eco calendar contains the US non-manufacturing ISM. Consensus forecasts a setback from 61.6, a multi-year high, to 59.1. Risks are tilted to the downside following regional US surveys, but the ISM will remain at very lofty absolute levels. Markets will probably shrug off any negative surprise. Heavy US and EMU supply is negative for core bonds this week. The US Treasury starts its mid-month refinancing operation with a $37bn 3-yr Note auction. Some (US) investors might decide to stay side-lined ahead of tomorrow mid-term elections. Polls suggest Republicans will keep control of the Senate while losing their House majority. This scenario should by and large be discounted. The Eurogroup meets today with ministers likely having a say on Italy's budget ahead of Italy's next week's deadline to send changes to the EC. This might spark some volatility in BTP's, but we don't expect a new sell-off. We have a downward bias for core bonds at the start of the trading week. The US 10-yr yield is closing in on the 3.26% cycle high. Thursday's EC autumn forecast and Fed meeting are this week's other main events.

Download The Full Sunrise Market Commentary

Author

KBC Market Research Desk

KBC Bank

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.