KBC Sunset Market Commentary 04/11/2022 via Trader Talent

• US October payrolls beat estimates. Job growth came in at 261k thanks to solid gains in education & health, leisure & hospitality and professional services. It followed an upwardly revised 315k in  September. Wage growth accelerated slightly from 0.3% to 0.4% m/m to be up 4.7% y/y. That’s less than the 5% in September but still well above the 3% rule-of-thumb needed to keep inflation in check near 2%. The unemployment rate ticked higher to 3.7% (from 3.5%) even as the participation rate eased unexpectedly to 62.2%. This is because the unemployment rate is drawn from a different survey. In the so-called household survey, employment actually dropped by 328k. The mixed signals were picked up by markets eager to see signs of the labour market easing so the Fed can take it down a notch. Yields shot up at first, then quickly turned lower. Fed’s Barkin later poured some more cold water over heated markets by saying that it’s “conceivable that the Fed lands up above 5%, but it’s not a plan”. Current changes vary between -6.4 bps (2y) to +0.1 bp (30y) for US Treasuries. German/European yields underperform after some hawkish ECB comments from de Guindos and Lagarde. The latter stressed the central bank’s determination to avoid high inflation becoming entrenched, adding that removing policy accommodation may not be enough to reach the 2% inflation target (read: policy rates need to be restrictive). It’s a follow-up on her interview yesterday in which she said that even a mild recession wouldn’t bring inflation back to 2%, indicating tightening would continue even if the economy contracts. It feeds into our idea that the ECB last week didn’t intend to signal the dovish pivot markets were so keen on spotting. European swap yields rose 5.8 bps to 3.1 bps in a flattener before paring much of those gains as US dealings get going. In the UK, the long end of the curve underperforms (30y +5.9 bps but was as much as 14 bps). Andrew Hauser, head of the BoE’s Market division, said the bank will outline “shortly” how to unwind its emergency gilt portfolio. BoE chief economist Pill repeated Bailey in saying that rates don’t need to be raised as much as markets think, though added that more needs to be done to control domestic inflation.

• The US dollar on currency markets was already trading on weaker footing ahead of the payrolls and extended losses thereafter. EUR/USD (0.989) was saved by the bell and prevents a weekly close below the ST upward sloping trend channel. The trade-weighted DXY dips from 113 to 111.6. USD/JPY nudges lower to 146.86 with the dollar the only G10 currency against which the Japanese yen advances. Commodity-based currencies including the AUD, NZD and NOK all perform very well amid rising oil (+4% and more), iron (+3%) and soft commodities (2-5%). Equities finish the week in good spirits. The EuroStoxx50 jumps almost 3%. Wall Street is currently printing gains of 1.4%.
 
News Headlines

• Canadian payrolls surprised friend and foe in October by adding 108.3k jobs on a net basis (vs 10k expected). The number of full time occupations was even larger at 119.3k (net). Part time employment fell by 11k. Employment rose in several industries, led by manufacturing, construction, and accommodation and food services. The Canadian unemployment rate stabilized at 5.2% even as the participation rate ticked up from 64.7% to 64.9%, the highest level since June. Total hours worked increased by 0.7% M/M and by 2.2% Y/Y. Hourly wages for permanent employees accelerated from 5.2% Y/Y to 5.5% Y/Y. The loonie profited with the US payrolls-related USD-setback adding to the picture. USD/CAD fell from 1.3650 to 1.3550. Key support (neckline head-an-shoulders formation) stands 1.3496. Canadian swap yields rise 5 to 7 bps across the curve. Today’s data suggest that last week’s slowdown by the Bank of Canada in its tightening cycle (50 bps instead of 75 bps expected) might turn out to be premature.

• CNB vice-governor Zamrazilova held a Q&A with analysts following up on yesterday’s decision to keep the policy rate unaltered at 7%, defying model-outcomes calling for additional tightening. She said that the risk of a wage-price spiral is now lower than previously anticipated. The majority on the board didn’t want to follow the model-suggested (big) rate hike as it wouldn’t justify the damage inflicted to the economy and as it would probably would have to be reversed within the year. The Czech koruna trades at its strongest level since mid-August today at 24.40. The CZK-strengthening came especially as the CNB vowed to keep defending the currency from unwarranted weakness via FX interventions.