A relatively muted reaction to the largest above consensus rebound in US jobs – a signal the recent risk rally may be starting to fade?

A relatively muted reaction to the largest above consensus rebound in US jobs – a signal the recent risk rally may be starting to fade?     

• USD: Rebound in US jobs data goes against all analyst forecasts - The US economy surprisingly gains 2.5 million jobs in May – above consensus for -7.5mln and even Citi analysts’ well-above-consensus -4.5mln, the unemployment rate falls to 13.3% from 14.7% and average wages are down 1.0%, an arithmetic consequence of job gains being focused among lower wage workers. The report shows that stronger-than-expected rehiring appears to have emerged earlier than even the most optimistic expectations.    

• USD: But the price action in FX is relatively muted – Safe Havens such as JPY weaken some 70 pips in the immediate aftermath of the US jobs data only for that weakness to fade by some 25 pips towards the end of Friday’s session (USDJPY’s move from 109.15 to a close at 109.60 is rather unimpressive considering the scope of the rebound in US jobs). Similarly, the broad based USD Index (DXY) manages to gains on  the US jobs report but by a less than impressive 30 pips only, UST 10Yr yields are up 8bp on the day to close at 0.90% but falling from the post jobs high of 0.95% - overall, a relatively muted reaction to a jobs report that exceeds consensus expectations by the largest in history!!   

• CAD: Canadian employment also rebounds strongly but price action similarly relatively muted - Employment rises as re-openings start, fiscal programs help with employment up 289.6k jobs in May, much-stronger than Citi analysts’ and consensus expectations for a 500k decline. Despite the strong job gains, the unemployment rate rises slightly to 13.7% due to an increase in the participation rate. Average hourly wages of permanent employees declines to 10%YoY from 10.5%, likely as more lower-wage jobs return.     

• CAD: Citi analysts see the much-stronger-than-expected rebound in employment in May as a positive sign that both gradual re-openings and fiscal measures such as the wage subsidy program are helping to repair the labor market after record job losses in March and April. However, Citi Research (and markets – given their relatively muted reaction) expect there will be some persistence in unemployment after the first wave of re-hiring.     

Germany: Fiscal focus shifts to demand stimulus    

• EUR: A huge new fiscal package from Germany of €130bn (4% of GDP) for 2020 and 2021 is a surprise. Citi analysts had expected fiscal stimulus for 2021, not earlier. However, some measures such as the VAT cut come into effect on 1 July 2020. Parliament will debate the package before the summer break. That means the stimulus will come earlier and perhaps be complemented by more in the 2021 budget. Forecast upward revisions ahead? Citi analysts are now more comfortable with their 2020 German GDP “growth” forecast of -5.4% compared to Bloomberg consensus at -6.2%. At the same time, Citi analysts also expect a further increase in the ECB’s PEPP asset purchase program (raised last week by EUR600bn to now EUR1.35trn) probably by the December policy meeting – adding to the strength of coordination of monetary and fiscal policy in the euro zone to lift longer term growth and inflation expectations and the euro.       

• GBP: Brexit - talks remain deadlocked but this is far from the end - Reports Friday suggest the final round of EU-UK talks ahead of a European summit later this month remain deadlocked. This is likely to increase the pressure UK PM Johnson and EC President von der Leyen to find a path to a compromise in high level talks later this month.  EU chief negotiator Michel Barnier however notes that a deal would need to be reached by the end of October in order to ratify it in time for the current deadline of December 31. Therefore he hopes negotiators can meet face to face by the end of June - suggesting another round of negotiations then or early July.    

Week Ahead – FOMC meeting and Chinese data                                   

• USD: The better than expected US jobs report Friday should make Fed policymakers a bit more upbeat, but unlikely to substantially change their decisions or forecasts. Forward guidance is likely to be paired with a weak form of yield-curve control –  commitment to purchase Treasuries in amounts as necessary so that front-end yields (perhaps out to 3yrs) reflect the policy path implied by forward guidance. Summary of economic projections is likely to show a median for no hikes through 2021, although some dots will revise above zero at this point. By 2022 the median is likely to show a shallow hike pace. Despite the better jobs report Friday, Citi analysts expect Fed forecasts will reflect a fairly slow recovery in real GDP, with a large contraction in 2020 followed by a rebound in 2021, and a very dovish path for both unemployment and core inflation.   

• USD: Core CPI at a turning point - CPI MoM – Citi: -0.1%, median: 0.0%, prior: -0.8%; CPI YoY – Citi: 0.2%, median: 0.2%, prior: 0.3%; CPI ex Food, Energy MoM – Citi: 0.0%, median: 0.0%, prior: -0.4%; CPI ex Food, Energy YoY – Citi: 1.3%, median: 1.3%, prior: 1.4% - Citi analysts project roughly flat core CPI prices – admittedly with a wider-than-usual confidence interval. After two months of deflation, the team sees the potential for core prices to stabilize and then begin moving higher as some of the most extreme discounting in hard-hit sectors is reversed.

• CNY: China inflation. Money supply growth and new loans data - China’s CPI may have declined further to 2.5%YoY in May, and PPI may have remained flat at -3.1%YoY in May. Citi analysts expect M1 and M2 growth to further accelerate to 5.8%YoY and 11.2%YoY, respectively, in May and the team continues to expect robust new loans (Citi: RMB1.7trn) and TSF (Citi: RMB3.5trn) in May.   

This is is an extract from the Daily Currency Update, dated June 8, 2020. Please approach a Citigold Relationship Manager if you would like more information.