Macroeconomics: The Day Ahead for 5 March

Another rather tense week in financial markets concludes with US monthly labour data topping a modest schedule of data and events, which also includes German Factory Orders (slightly better than expected) along with Canadian, French and US Trade data, some BoE and Fed speakers, and whatever emerges in headline terms from China’s National People’s Congress on future policy, above all in respect of the new 5-Year Plan, the economy, and technological self-reliance.

Whether one blames the lack of any hint from Powell about the Fed move to some form of yield curve control in his comment yesterday, or whether it was the OPEC+ decision to keep production capped at current levels (excepting Russia & Kazakhstan) prompting a surge in oil prices, the fresh highs in long-term US nominal and real yields now pose a challenge to a broad array of risk markets (see Eurodollar and US 10 yr charts and table), and the ‘rising yields are a positive signal’ mantra is clearly the wrong one. Indeed it reeks of ‘cakeism’, i.e. promising low rates for as far as the eye can see, while talking up the economic outlook and dismissing the rise in inflation. But of even greater concern are renewed problems in the US Treasury market with the General Collateral (GCC) repo rate toying with negative territory, and the current 10 yr Treasury trading very ‘special’ in the repo markets at -3.0 to -4.0% (i.e. to lend cash to borrow the 10 yr, the lender must pay those current negative rates). The Treasury’s decision to run down its Cash Balance at the Fed in combination with the Fed’s regular QE operations are very definitely exacerbating this problem. It is also worth noting that for all of the choppy price action in rates, it has been another bumper week for USD IG ($65.5 Bln) and HY Credit ($10.46 Bln) issuance, which has been easily absorbed with average credit spreads remaining close to record lows, though Asia USD spreads continue to widen. This week’s Investing Channel video also looks at these issues in the context of last week’s end of month rout, click here to view.

Next week brings the first two of this month’s G7 central bank meetings (BoC and ECB, with Fed, BoJ an BoE meeting the week after), which will test their respective mettle in the face of upward pressure on long-term bond yields, rising market instability and the hollow vessel of their current forward guidance. Each one has its own specific challenges, with the ECB again riven by a renewed and deepening division between hawks from northern countries and doves from the Club Med group. Statistically next week has China (officials talking about a 50% surge, mainly due to base effects) and German Trade, China and US inflation, UK monthly GDP and other activity indicators, Japanese wages & BSI survey and Canada’s labour data.

U.S.A. – February labour market report

– Interpreting US or any other country’s labour data requires a good deal of perspective, above all eschewing judgements based on pre-pandemic standards. Expectations for February Payrolls have been creeping up from expectations of a modest pick-up from January’s weak 45K to the current 200K (for both headline and private), with bad weather effects (not Texas) a wildcard in the equation. The fact remains that permanent job losses continue to rise and as of January just over 10.0 Mln Americans were unemployed, and that the labour force participation rate remains low at 61.4% by comparison with 63.4% in January 2020. The Unemployment Rate is seen unchanged at 6.3%, despite a sharp fall from December’s 6.7% suggesting the risk of a mean reversion, indeed if any uptick were accompanied by a rise in the Participation Rate and a fall in the Underemployment Rate (still very high at 11.1%), this would in fact be a positive. Average Hourly Earnings remain meaningless given distortions from compositional effects (above all lost low paid jobs), while the Average Workweek is seen dipping from January’s record high 35.0 to 34.9. Whatever the outcome, the report will confirm that the economy is a long way from pre-pandemic levels, and by extension the Fed’s target on Employment, which the Fed has made clear is as important in policy outlook terms as its inflation mandate.