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FX Update: Weak US treasuries after weak US jobs report merit most focus
John J. Hardy
Chief Macro Strategist
Summary: The US change in nonfarm payrolls showed about half as much growth as expected, echoing the ADP number this week. This has triggered minor volatility in the US dollar, but the more interesting development is that US treasuries sold off again despite the weak data. This keeps the focus firmly on US treasury yields going into next week as a potential disruptor of the market narrative across assets, including in FX.
Today’s FX Trading focus:
A brief note on US jobs report and the US dollar
The US nonfarm payrolls change came in far weaker than expected at a mere +245k versus +460k consensus expectations, and thus the worst rate of growth in payrolls for the cycle since the pandemic outbreak. The unemployment rate dropped 0.2% to a new local low of 6.7% as expected, but that was on a simultaneous drop of the participation rate by 0.2% to 61.5%, pretty much a wash (and the 2% lower participation rate relative to pre-pandemic suggests real rate, including people likely not working at full speed, is closer to 10% or worse). Anecdotally, as I pointed out on this morning’s Saxo Market Call podcast, data from Homebase, an employee scheduling company with more than 100k small businesses enrolled, suggested hours work dropped and businesses began closing starting in late October, showing the first decline since March. The caveat there is that small business is not all business and other employers that have been big winners from Covid-19, like Amazon, are hiring in droves. Still, the data was not positive.
The volatility was not particularly noteworthy in the wake of the report in FX, with some minor USD strength in evidence before weakness came back in. But the more interesting development for all markets was the fresh weakness in treasuries despite the weak data, which is taking the 10-year treasury yield back toward the key highs since the pandemic outbreak – around 1.00% for that 10-year benchmark and 1.75% for the 30-year. US yields have been sufficiently rangebound for months to not act as a major input into the market narrative across asset classes, but it is our firm belief that this could change on any notable range break for the long end of the yield curve in US treasuries. Would this quickly trigger a value-momentum shift in equities in favour of the former, would it serve as a general risk-off driver akin to the. Or… is it USD negative on the assumption that the Fed will simply not allow yields to rise much higher before capping them with yield curve control, or even USD positive if the Fed sits on its hands a bit and US treasuries crowd out other financial assets?
I don’t have the answer to these questions, but a break higher in yields could prove a gamechanger for asset market volatility, which has recently ebbed in equities, and only picked up slightly in FX on the break down in the US dollar. Going into next week, keep at least one eye on the US treasury market and how markets behave if volatility picks up further there, and then how Fed officials react in various appearances, but especially during the December 16 FOMC meeting.
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