US bond yields fall on weak jobs data
Yesterday’s much weaker than expected ADP jobs report in the US looked initially like it might cause a stir in markets, but in the end the price action proved limited enough with some caution prevailing amid the uncertainly caused by the government shutdown in the US. A firming of Fed rate cut expectations on the back of the jobs data contributed to a decline in US bond yields, but the dollar still managed to hold its own, slipping a little against the yen and sterling while ending the day largely unchanged against the euro. The single currency is trading at about $1.1750 this morning, a touch lower than yesterday morning’s levels, while sterling is trading at around $1.35, a little firmer than yesterday morning. This leaves the pound at circa £0.87 versus the euro, in and around its best levels of the week so far.
US government bond yields fell by 5-7bps, led by the short-end of the curve, as the market priced in more or less two quarter-point cuts in interest rates by the end of the year, while German and UK yields were essentially flat. In equity markets, US stocks managed to eke out small gains, notwithstanding the weak economic data, with the S&P 500 adding around 0.3%, while European indices outperformed, closing up about 1% on the day.
The ADP report in the US showed employment fell by 32k in September, a much weaker outcome than the 51k increase expected, while the August outturn was revised down to -3k from +54k. For Q3 as a whole jobs growth averaged +23k a month, the same as for Q2 (+22k) but a sharp deceleration from almost +140k a month in the first quarter of the year.
Headline inflation in the Euro area ticked up as expected in September according to the flash reading, rising to 2.2% from 2.0% in August. Core inflation was also in line with the consensus forecast at 2.3%, unchanged from August, with goods inflation remaining at 0.8% and services inflation nudging up to 3.2% from 3.1%.
While the market sees little chance of a UK rate cut at next month’s Bank of England MPC meeting, the outcome is likely to be close call judging by comments from a number of Committee members this week. One member who is almost certain to vote to leave rates unchanged is Catherine Mann (admittedly a noted hawk on the MPC), who believes the risk of the recent rise in inflation (to well above the 2%) proving more persistent than expected may be “playing out”.
It’s relatively quiet on the economic data front today with Euro area unemployment and US factory goods orders the only releases of note (the regular weekly jobless claims report in the US is delayed because of the government shutdown). There are a few Fed/ECB members due to speak as well over the course of the day.