The Launch Pad: U.S. adds fewest jobs in almost six years, USD tumbles via @connectwealth
Friday, June 3rd, 2016
Fewest jobs in six years – TODAY
There is a positive tone to the markets to take us out of the week, with shares around the world trading higher, and both Australia and England ticking into positive territory for the YTD return of their major stock markets.
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
There is a tonne of data due out this morning, mostly US and most importantly, the US jobs numbers will be out by the time you are reading this. See below for comments. As such, early indications for futures, which are flat, may not carry much meaning. The bond market is also pretty lazy this morning, with the benchmark US Treasury 10 year holding about 1.80%. It has been unable to breakthrough 2% since falling under that yield in January, despite the “breakevens” inflation rate indicating that the market put in a floor on expected inflation in February:Fewest jobs
This could be the tester. Looking back at the last couple weeks there have been a number of days during which the market started soft and finished strong. That is a clearly a good sign but given the weak jobs data this morning setting up a weak start, today will test that pattern. Well this probably removes the chance of a June rate hike, bonds are higher, the USD is weaker and gold has popped up. The chart of the day is the implied probability of a rate hike at the Fed’s June meeting. The minutes had the chance up to 30% a week ago, it is now down to 4%.
You might have read Bill Gross’ latest monthly note where he calls the past 40 years in the bond market a black swan. Now Ben Carlson rightly points out that the return for bonds is HIGHLY CORRELATED to the beginning yield – makes sense, right? So for Canada, we will remind everyone that the 10 year yield is 1.25%. Lower returns from the bond portion of your portfolio? Yes. Should that mean abandon diversification? Absolutely not!
With the ECB and OPEC down, our focus in June now shifts to the Fed and the ‘Brexit’ vote. Some Fed members are noting that ‘Brexit’ would be a factor he would consider at the June policy meeting. The Fed meet on June 14th and 15th, with Brexit and the weak labour print this morning, suddenly caution might take over. They are data dependent after all.
How much will you pay for your bonds? The WSJ reports that negative yielding debt not tops $10 trillion. Japan is he largest source of subzero bonds, but negative rates have spread to over 14 countries. Collectively investors are losing $24 billion a year on negative rates. As rates drift lower, (the jobs print this morning isn’t helping) we will continue to see increasing pressure on banks, insurance companies and pension plans.
In April, Caixin’s services PMI fell to 51.2, the lowest reading in three months. The number is still in expansion territory; however, it seems as though growth is decelerating. China’s manufacturing economy has been under pressure for some time. As such, it is important for the services economy to lead the way. More from CNBC here.
Diversion: Jason Voorhees, your steak knives are ready.
fewest jobs – COMPANY NEWS
Valeant Pharmaceuticals has received a default notice from bond holders that they defaulted on their obligation by not filling the quarterly report on time. Valent expects to file the report before June 10th. Immunomedics was down as much as 41% in premarket trading afterASCO removed their presentation on the Cancer Drug from its annual meeting because of confidentiality concerns. Twin Butte has received another day on what could be death row as the company needs to repay an $85mm loan. This is the third day they have received an extension as the weigh the options that include selling all the assets of the company. Wal-Mart is starting delivering groceries through ride sharing services Lyft and Uber. This is their latest effort to keep up with Amazon.
fewest jobs – COMMODITIESfewest jobs fewest jobs
Although there were no production cuts agreed upon at the OPEC meeting yesterday, there were some accomplishments. The group named Mohammed Barkindo of Nigeria the new chief of staff, they all agreed to the current state of oil production accepting the fact that Iran is going to continue to ramp up production. U.S. wheat farmers are facing a major storage crunch as their silos still hold large amounts of last years crop. Inventory levels are at the highest level since 1988. This could lead to farmers having to actually just store the wheat outdoors in parking lots and the like. Prices are so low for wheat that it makes it uneconomical to ship and global demand has soften considerably because of a strong dollar.
fewest jobs – FIXED INCOME AND ECONOMICS
*We apologize in advance if the tone in our subsequent comments are obtuse, sardonic and flippant, but there is really no other way to describe our reaction at time of writing*
The entire world had been waiting in earnest for this morning’s U.S. nonfarm payroll number to see if we could complete the hat trick of good economic data this week. Tuesday’s PCE Deflator and Wednesday’s ISM print had already ticked off the first two boxes on our path towards a Fed rate hike this summer. Fed futures had been pricing in a greater than 55% chance that we see the overnight rate move higher for the second time since the global financial crisis — a huge jump from the 17% likelihood just two weeks ago. Well, it now looks like officials will have to take a step back from these presumptuously hawkish overtones asthe U.S. economy only added +38K jobs last month for the worst monthly headline gain since September 2010 (when -52K jobs were shed). This is not a typo and no, your eyes are not deceiving you as your’s truly had to do a quadruple take as well! There is no sugarcoating the overall report as negativity abounds throughout. Forecasters had expected a +160K rise. Fail. April’s +160K gain was revised down to just a +123K increase. Fail again. Private payrolls rose by only +25K versus the +150K consensus. Big fail. The manufacturing sector lost -10K (-2K projected) for the third drop in four months. Construction work was down -15K while goods-producing hires fell -36K (both at the worst in 6 months). Wage inflation rose by just half of April’s pace (+0.2% versus +0.4% prior). The average workweek was expected to tick up to 34.5 hours and that missed as well. The unemployment rate ticked down to 4.7% from 4.9% but that was entirely a function of the participation rate — more Americans have given up the job search entirely with only 62.6% looking for work (lowest this year).
Reaction to the downtrodden report is as you would expect. Equity futures are lower (-0.5%), the dollar weighted index is getting crushed (lower by a full point to 94.50), the USD/CAD cross is off 150 pips to below 1.2960, gold is shining brightly by $27, and Treasury bonds are surging across the curve. Two year yields traded at 0.88% prior to 8:30AM EST and are now rallying to 0.78% (lowest since mid-May), while the long bond is higher by more than a point. The yield curve is steeper by five bps (mostly on short end buying) with the 2-30 Treasury spread at +174.1 bps. Fed futures have essentially priced out a hike in June and are down to just a 1/3 likelihood in July. This is really a shocker all around and you can expect risk aversion to be paramount throughout the session (as an aside we are aghast at how wrong the ADP release from yesterday was!). FOMC Chair Janet Yellen takes the podium on Monday and you can bet this report will be front and centre on her discussion list.
fewest jobs – CHART OF THE DAY