US and yields bounced on strong US payrolls report - Westpac

Analysts at Westpac explained that the US dollar and bond yields bounced on the strong US payrolls report Friday. 

Key Quotes:

"This added to the weight on AUD/USD, which fell more than 1 cent to the low 0.79 area. US equity markets followed Europe's steep losses. The Australian and global data calendar is low key today, ahead of the RBA meeting Tuesday."

"Asia’s equity weakness continued in Europe and accelerated in New York trade. The S&P 500 fell 2.1% - the largest one-day fall since 2016. The DJIA slid -666pts, -2.5%. In an interview broadcast after the NY close, departing Fed chair Yellen pointed out that US equities and commercial real estate prices were high though she wouldn’t declare a bubble. Yellen also admitted that she was disappointed not to be offered a second term as Fed chair.

US non-farm payrolls rose 200k in Jan, above expectations of 180k. Benchmark revisions over 2017 were also positive. The household survey corroborated the establishment data with a +409k gain though the unemployment rate remained at 4.1%. Job gains were broad-based: construction +36k, manufacturing +15k, retail +15k, and services +139k.

Markets focused closely on wages: average hourly earnings rose 0.3% (vs 0.2% expected), with the prior month revised up to 0.4%. The annual rate bounced to 2.9% (vs 2.6% expected) - the highest since 2009. 

This sparked a rise in US 10yr treasury yields from 2.79% to 2.85% - the highest level since Jan 2014. This yield rise was sustained, unlike the bounce in 2 year treasury note yields, which ended the day 3 basis points lower. This was presumably in response to the sharp fall in equities. Fed fund futures trimmed pricing for another rate hike in March to 93%.

The US dollar rallied on the jobs data but had already been rising against most currencies, recovering some of the ground lost either side of year-end. EUR/USD was comparatively resilient but still lost about 0.6% over the day, to 1.2435 early Monday in Sydney. GBP/USD slid more than 1% to 1.4110.

USD/JPY rose 1 yen to 110.40 from early Friday trade to the NY afternoon but then eased to 110.00/10 as the yen found some safe haven buyers. AUD/USD starts the week just above 0.7900, down about -1.6% from 0.8040 on Friday morning. The US payrolls report accounted for about 50 pips of the fall. NZD/USD followed a very similar trajectory, -1.5% to below 0.7290, leaving AUD/NZD down a touch at 1.0855.

Event risk: Australia’s calendar is busy this week but today we see only unofficial data, including the Jan inflation gauge from Melbourne Institute. The Dec reading was 0.1% m/m, 2.3% y/y.

There are a number of Asian data releases, though mostly low profile e.g. services PMIs. Indonesia Q4 GDP should see annual growth hold just above 5%.

The US data highlight is the Jan non-manufacturing sentiment survey from ISM. This sector hasn’t been quite as hot as manufacturing but should still be quite positive, with consensus an expansionary 56.5."