US Payrolls report: Any downside miss would fuel the fire and add volatility

Markets

Financial markets came crashing down yesterday in the aftermath of the Trump administration’s new trade policy. A shocking range of tariffs risks retaliatory measures and could plunge the world into an outright trade war. Recession fears spiked. Stock markets stood at the center of attention with losses in Europe mounting to >3.5%. Wall Street shed some 4% (Dow) to 6% (Nasdaq) in value. The technical picture deteriorated significantly in the likes of the S&P500 (‐4.8%, losing the 5500 support area). The US yield curve bull steepened impressively. Front end yields tumbled around 17 bps while longer maturities, also supported by haven flows, dropped 3 bps (30‐yr) to 10 bps (10‐ yr). German Bunds rallied in lockstep with yields easing between 3 (30‐yr) to 9.5 bps (5‐yr) on a net daily basis. Such front end outperformance stems from markets assuming central banks will come to the rescue with aggressive rate cuts but ignores the fact that the inflation context is completely different than what we’ve been used to prior to the pandemic. Such an initial kneejerk reaction is not abnormal though and could continue in the short run. US rates this morning drop another 4 bps across the curve. Money markets are currently pricing in more than four 25 bps rate cuts this year with a first one fully discounted for June. It’s against this backdrop that Fed chair Powell is to discuss the economic outlook later today. While the central bank has a dual mandate, their primary focus today is still inflation. We think it is way too early for Powell and the Fed to already shift to growth and as such validate current market pricing. It’s a matter of short‐term inflation risks vs medium‐term growth risks. The Fed still has some credibility to regain after grossly misjudging the post‐pandemic CPI surge. It is also against this recessionary backdrop that the US payrolls report will be read. Any downside miss would fuel the fire and add volatility. We think a topside surprise is unlikely given, for example, the weak (employment) details from yesterday’s services ISM. Markets would dismiss it instantly anyway. The US dollar fell off a cliff. A growing recessionary risk premium is the go‐to explanation but we suspect more fundamental de‐dollarization dynamics are at play too. EUR/USD surged to an intraday high of 1.1144 before closing at 1.105. Ongoing dollar weakness this morning pushes the pair back towards the 1.11 lever though and remains on its way to 1.1214 (2024 high). DXY slid from 103.8 at Tuesday’s close to 101.7 currently. The Japanese yen is the one true safe haven that takes USD/JPY towards a six month low of 145.9. China was among the hardest hit by the US (up to 54%). Its currency dropped to USD/CNY 7.3 at the open before paring losses to 7.28.

News and views

National Bank of Poland governor Glapinski made a surprise dovish U‐turn in the presser one day after Wednesday’s rates status quo (5.75%). Until recently he advocated that no rate cuts should be expected anytime soon. However, yesterday he assessed that softer than expected Q1 inflation figures caused a radical shift the MPC’s outlook. Even as he still wants confirmation on recent softer inflation data, the NBP governor indicated that a first rate cut in May or in the following months is possible. Glapinski also said that that easing may exceed 100 bps this year if the government prevents energy prices from rising. The policy rate might be reduced further to 3.5% next year, in case inflation stays benign. He also indicated to favor one‐off rate cuts rater than a series of steps. After even rising marginally on Wednesday, the Polish 2‐y swap yield yesterday tumbled from 4.84% to 4.52%. The zloty fell off a cliff with EUR/PLN jumping from the 4.18 area before the press conference to close near 4.225.

Rating agency Fitch downgraded China by one notch to A from A+. The move came after the agency in April last year put the outlook off the country on negative. “The downgrade reflects our expectations of a continued weakening of China's public finances and a rapidly rising public debt trajectory during the country's economic transition.” The outlook is now again set at stable. Fitch expects that sustained fiscal stimulus will be deployed to support growth, amid subdued domestic demand, rising tariffs and deflationary pressures. In this context, Fitch sees “the government debt/GDP to continue its sharp upward trend over the next few years, driven by these high deficits, ongoing crystallisation of contingent liabilities and subdued nominal GDP growth.” The assessment was made before President Trump announced new tariffs on Wednesday, but analysts at the agency indicated that there is headroom at the current rating to accommodate the likely implications for economic growth and fiscal metrics from the tariffs.

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