6 Sigma Beat on US Payrolls
Friday’s US unemployment data delivered a 6-sigma upside deviation vs. expectations with 528k non-farm payrolls jobs being created last month (vs. expectations of 250k) and an unemployment rate at 3.5% or its pre-pandemic low level. With most investors and economists betting or observing a recession unfold, this caused some knee jerk reaction, mostly causing bonds to rally and initially stocks to drop before the former kept their losses while latter recouped most of theirs for the day, ending the week slightly higher with the numbers below.
The situation in the bond markets is confused with the only sure thing being that volatility spiked and that it is likely to remain elevated as investors are caught between the hammer (BoJ, ECB intervention) aimed at capping yields at all costs and some expression of free markets in the US trying to respond logically to the publication of a notoriously unreliable economic data that delivered a positive surprise contrasting with the evolution of a rising jobless claims trend and corporate announcements of a slowing in hiring. One narrative starting to take hold last week was that more jobs were created than expected with people now increasingly in need of several jobs to make ends meet amidst elevated price pressure, wobbly confidence and an uncertain global outlook.
While some investors saw the 12bps gap higher in 10y US yields as a glass half full (with an improving job market number signalling accelerated tightening) others saw the historic yield curve inversion (which reached -41bps on the 2/10Y on Friday), more as the glass half empty of a grim outlook and accompanying Fed pivot.
The Fed Chair narrative conveyed over the past few weeks that US Fed policy rate is “close to the neutral rate” (with inflation at 9.1%?) took some slack last week from M. E. Erian and L. Summers but their opposition to the Fed policy is nothing new…
Last week and perhaps in contrast to the Fed’s discourse, the BoE not only tightened by 50bps but accompanied the decision with some alarming comments on growth and inflation. Who should we believe between the reassuring ECB, the BoJ and the Fed or the alarming BoE consideration that growth and inflation prospects are all similar in Western economies?
Inflation is likely heading South for a while after oil and commodities dropped sharply (some by 30% including agriculture products following the safe passage arrangement brokered by Turkey to free wheat deliveries from the Ukraine war zone) in July-August but who could be genuinely reassured by the resilience of a US consumer after retail sales were held artificially strong by rising prices and an explosion in credit card debt as data reported last week showed that Americans added 46bn to their credit card in Q2, the sharpest increase in more than 20 years (+13% YTD?
Earlier last week, there were some markets jittery accompanied by the controversial visit of N. Pelosi to Taiwan that was so “dramatized” by US media that US stocks rebounded like a coin spring on the observation that her plane was not gunned down… She seemed sufficiently short of arguments herself to lay forward that the whole fuss about her visit probably had much to do with the fact that she is a woman…(maybe the accusation of massive insider trading of her husband is also due to the fact that she is his woman…).
On the war front, there is always two propaganda machines at work. The one of Zelinski suffered a blow last week after Amnesty International published (and maintained after being criticized) a report accusing Ukraine to actively pursue human shield tactics, militarizing schools and hospitals.
Chinese markets underperformed last week again amidst rising geopolitical tensions between China and the US, the continued unwind in adverse real estate dynamics and continued China bashing. Chinese equities turned from global outperformers to laggards again as their recent recovery faltered with the CSI 300 Index retreating for a fifth week to extend its slide since July to more than 7%, while stocks in Europe and the US have recouped some ground. There were some good news for China over the week end after an improving trade balance showed exports rose 23.9% yoy (vs. 19.6% expected) in July while imports rose by 7.4% yoy (vs. 5.7% expected).
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Over the past week, the S&P500 gained 0,4% (-12,9% YTD) while the Nasdaq100 gained 2,0% (-19,1% YTD). The US small cap index gained 1,9% (-14,2% YTD).
Cboe Volatility Index dropped -0,8% (22,8% YTD) to 21,15.
The Eurostoxx50 gained 0,5% (-11,2%), outperforming the S&P500 by 0,2%.
Diversified EM equities (VWO) gained 0,1% (-16,3%), outperforming the S&P500 by -0,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (11,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) was unchanged (-4,2%).
10Y US Treasuries underperformed with yields rising 18bps (132bps) to 2,83%. 10Y Bunds climbed 14bps (113bps) to 0,96%. 10Y Italian BTPs were unchanged (185bps) at 3,02%, outperforming Bunds by -6bps.
US High Yield (HY) Average Spread over Treasuries dropped -41bps (145bps) to 4,28%. US Investment Grade Average OAS dropped -2bps (53bps) to 1,53%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 0bps (56bps) to 1,11%.
Gold gained 0,5% (-2,9%) while Silver shed -2,3% (-14,6%). Major Gold Mines (GDX) were unchanged (-18,0%).
Goldman Sachs Commodity Index sold off by -6,0% (27,9%). WTI Crude sold off by -9,7% (18,3%).
Overnight in Asia,,,
S&P500 -3points; Nikkei unch.
San Francisco Fed President Mary Daly said the US central bank is “far from done yet” in bringing down price pressures.
Iran nuclear talks resume today.
US CPI is due on Wednesday, PPI on Thursday.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.
BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.
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