US Jobs Data Awaited, but Barring Significant Surprise, May Not be Key Driver

The US dollar is mixed ahead of the US employment data.  The Antipodeans and Scandis are doing best while sterling and the Canadian dollar are under-performing.

Investors appetite for risk has increased.  The market is confident that the next Fed hike is unlikely to be delivered before June.  The implied yield on the June Fed funds futures contract is 45 bp.  This is up from 38.5 bp on February 11.  If the Fed were to hike rates on June 15 and Fed funds were to average 38 bp in the first half of the month and 63 bp in the second half of the month, fair value is about 49 bp.

China, which is beginning its legislative session (NPC), has already eased monetary policy through a cut in required reserves and has signaled scope for some fiscal support as well.  While BOJ's Kuroda has explicitly denied planning another rate cut at this time, the government is contemplating another supplemental budget.  The ECB meets next week, and although reports, which appeared to help support the euro, suggest there is no consensus yet on anything besides a 10 bp deposit cut, investors do anticipate more.

While some may express concern about the credibility of the Federal Reserve, which will likely change the dot plots and scale back the four hikes anticipated in December to maybe two, the larger credibility issue lies with the BOJ and ECB.  Kuroda had denied intentions of introducing negative interest rates in Japan a week prior to doing so.   Many investors feel they were misled.

The ECB's credibility is a different issue.  Here it is really more of a question of whether Draghi has the authority that matches his rhetoric.  He talked a good game in the lead up to the December meeting, and many felt the actions fell shy of what he had implied.  The euro had fallen to almost $1.05 in anticipation and had not seen that area again.

Nevertheless, the greater risk tolerance is evident in the strength is evident in the strength of the more volatile major currencies, the underperformance of the yen this week (up 0.3%, the least of the majors), the recovery in equities, where major bourses are up 2%-5% this week.  Oil prices are up around 5% this week.  MSCI Emerging Market equity index is up 6% this week ( poised to finish the week at its best level since January 4).

There are some reports that claim China intervened through the so-called "policy banks" in the equity market, apparently buying large cap shares, especially banks.   The ostensible motivation was to ensure stable market as the National People's Congress began.  The Shanghai Composite is advanced by 0.5%, led by a 2.6% rally in financials, of which bank shares rose 4.4%, and insurance companies rose 3%.   Small cap shares traded heavier, and this was reflected in the 2.9% decline in the Shenzhen Composite (though there too bank shares performed well, advancing 2.6%).

The consensus calls for around 195k increase in US nonfarm payrolls.  While it would be an improvement on the 151k increase in January, it would be the second consecutive reading less than 200k.  This is not too worrying with the unemployment rate at 4.9%.  Many economists project job growth a 150k a month or so is sufficient to absorb slack in the labor market and push the unemployment rate lower.  In January, the details of the report, including the increase in earnings and hours worked, were better than the headline.  The risk is that in February it is the other way around with a better headline and softer details.   Nevertheless, barring a significant surprise, we don’t expect today’s report to seriously boost the chances of a Fed hike on March 16.