By Chris Weston
It’s been employment day in Asia today, and both Australia and New Zealand produced blockbuster numbers. The amount of economists scratching their heads in both regions would be high, while traders question what the results mean for future policy. Both central banks (RBA and RBNZ) have made comments before that they take these employment numbers with a pinch of salt, however the market seems to think the results could have influence and the swaps market has lowered the probability of an RBA June cut to 21% (from 40%).
In terms of the Australian number, there wasn’t much to dislike; composition was good with 70% of the created jobs being full-time and the unemployment rate ticked lower, with an increased participation rate of 65.3%. Even the March numbers were revised slightly higher. All in all they were excellent numbers, however the cynics would say it’s hard to rationalise the huge month-to-month swings in reported employment (April +50,100, March -31,100 and February +72,200). Trend-followers will point out that the pattern is up, with trend employment now at 35,000; however on the other side of the coin, the trend in the unemployment rate continues to be down.
AUD/USD naturally reacted, hitting a high of 1.0254, and given the level of big names that were/are short the pair, including George Soros and now US hedge fund manager Stanley Druckenmiller, perhaps positioning was overly short. All we need to hear now is that George Soros took profits on his shorts after the rate cut and reversed in hope of a strong Aussie employment number, and the market will then look to follow him on even a hint of a future trade. Importantly though, AUD/USD is back in the longer-term range of 1.06 to 1.02 and that could be very important as the pair hasn’t been able to convincingly break it.
Australian bonds are finding sellers (again), with the ten-year up five basis points at 3.17%. Tomorrow, Treasury will look to auction A$600 million of ten-year bonds and it will be interesting to see the level of demand here.
Equity-wise, the strong jobs print perversely saw the market under pressure. The yield plays took the hit as expectations came out of the market of future cuts, and while a spike in AUD/USD or slightly hotter-than-expected China CPI print (2.4%) are rarely positive, resource plays have held relatively firm. NAB’s result didn’t shoot the lights out, and while the bank beat modestly on cash earnings and dividend, revenue was a touch weak. Anyhow, given the results recently from ANZ, MQG and WBC, we’ve seen this story before and stocks have to come up with something pretty special to attract new shareholders. News Corp on the other hand has delivered the goods and shown it is a quality brand. Its yield is low, but seems to be delivering as a growth stock time and time again.
Japan has pushed higher despite USD/JPY failing once again to break ¥99.00, however perhaps the bigger talking point has been the 25bp cut by the Bank of Korea. This move was out of consensus, and while we had heard the bank prep the market by highlighting it had been watching rates, many feel this was a move driven by pressure from the government to free up room for tighter fiscal policy. Whether this cut actually does anything positive in Korea is yet to be seen, and most economists would say the economy needs structural reform and perhaps more support on a fiscal level.
So despite all the economic dramas in Asia, the European market will probably pay little attention and look set to open modestly higher. The UK takes centre stage on the data front, with industrial production (expected to print +02%) and manufacturing production (+0.3%) on the cards. A little later we get the BoE meeting, although not much is really expected and probably won’t be until Mr Carney gets into power in July. Cable looks interesting and a closing break of the 50% retracement of the year high to low at 1.5605 should push the pair up to 1.58 in the short term. Downside should be contained within the ascending channel.
In the US there isn’t much to really worry traders, so perhaps we can see them continue with the positive theme. It’s worth remember the top of the channel is only five handles higher on the S&P 500 at 1637, so any further upside could be an opportunity for traders to get aggressive and short the market for a quick (but contained) pullback. Initial claims are released and the market is expecting a slight tick up to 335,000.
