Another positive week for credit saw the yield on the 10-year UST fall over 8bps after US employment data broadly surprised to the downside; in fact the benchmark Treasury fell to its lowest level this year. The non-farm payroll reading was released at +138K, with a net revision over the last two months of -66K; so much weaker than expected headline numbers for economic bulls. The unemployment rate fell to 4.3%, due to the participation rate dropping to 62.7% from 62.9%, and average hourly earnings were released at 0.2% equating to 2.5% yoy, below expectations. The dollar remained on the back foot last week, the DXY Index fell 0.75%; the greenback is now trading down at levels last witnessed in October last year.
We think the Fed will still tighten this month despite the broader disappointing economic data prints, however, this does question the future outlook, as the Fed, have both the funds rate and balance sheet situation to contend with; too much activity on either or both could be recessionary. Markets will be watching US data releases keenly this week: with the likes of Nonfarm productivity, factory orders and Markit PMIs on Monday; market expectations are for no change to the services reading, at 54. Tuesday sees the JOLTS job openings with consumer credit for April out on Wednesday. Markets will be listening closely to Comey’s testimony on Thursday, with initial jobless claims the only key data release, and Friday will see April’s wholesale inventory release.
Elsewhere the renminbi had a very positive weak, gaining 0.67% (spot) against the dollar; year to date the onshore currency (CNY) is up 4.23% while the offshore renminbi (CNH) has gained 5.10%, on a total return basis. Last week witnessed incredible funding pressures in the CNH arena with short rates hitting ~43% in HIBOR, the Hong Kong equivalent to LIBOR, on Thursday. As these rates are higher than US rates renminbi investors get paid to buy and own the currency forward - the amount fluctuates with interest rate movements. That’s not to say one would get paid 42% for the month, however, the further along the yield curve you go the wider it gets. We took advantage of this across the Renminbi strategy by actively managing the the renminbi overlay. We extended in total 75% of our overlay, out along the curve selling our shorter dated positions and buying longer term positions; out to 45 days to lock in this funding pressure. On average the strategy locked in a pick-up of between 4.6% and 5.1%, annualised for the term of the position.
This week opens with global services PMIs; we woke up to China’s strong Caixin PMI release, up at 52.8. China’s foreign reserve reading this week will be of some interest also, with markets expecting a pick-up to USD 3.048bn. Elsewhere, we heard of the atrocious London Terror attacks over the weekend, this comes ahead of the UK elections this coming Thursday; the polls remain very split. Also on Thursday we will hear from the ECB, and the Q1’17 GDP reading for the euro area will also be of some interest.