Market commentary: Awaiting April’s US Jobs Report

This week markets have been rather unsettled, dominated by a widespread selloff across the board with investors dumping shares and bonds in an attempt to take profits off the table and turn into cash.

Investment grade and sovereign bonds were two of the asset classes that experienced the larger levels of outflows and volatility with the NYSE US 10 Year Treasury Future Index dropping almost 2% over the past 10 trading sessions, and European government bonds ETFs plunging this week along with the prices of peripheral sovereign papers and the German Bunds.

Equity markets also experienced weakness and increased volatility: the S&P 500, the most commonly used US equity index, dropped 2.07% last week, recovered most of its losses on Friday 1 May, opened higher Monday this week and then dropped 2.34% throughout the week, recovering only partially during yesterday session.

Within a “risk off” environment, where markets are struggling to adjust to the latest wave of selloffs and traders are rushing to adjust their positions, investors are likely to focus on important economic data that have been released over the past few days. Some good news came from the European Central Bank, that this week raised its economic growth and outlook forecasts for the Eurozone, now seeing Europe growing at 1.5% this year, up from previous expectations of 1%.

In contrast, soft GDP data and disappointing PMI readings dominated the US’s side of the Atlantic, making some economists questioning the real strength of the country’s economy. However, some encouraging signs came from the consumer spending data released yesterday by Visa Inc. that showed how in April retail spending (excluding automobiles and gas stations) increased 4.5% from last year.

Today investors will pay particularly attention to the April’s US Jobs Report due this afternoon, looking for reassurances that the stalling of the economy during the first quarter was an isolated event to be attributed to seasonality and bad weather, and that economic expansion has not derailed just as the FED prepares to raise interest rates.

A Bloomberg survey seems to projects around 230,000 new jobs for April, a number that would represent a sizable rebound from the very disappointing 126,000 additions registered in March, and would support the idea that the US labour market is still on track. However, if the number should come in below the 200,000 level, investors and economists alike will begin to draw a map of disappointing data (lower GDP growth, lower PMI readings, slowing job creation) that may suggest that the US’s economy is quite not as strong as it appeared to be in December-January when the market begun to price in an imminent interest rate hike from the FED.

Another important piece of data to pay attention to will be Wage Growth, which in April is expected to have climbed 0.2% month-on-month and 2.3% from the same period a year ago. Should these projections prove true, this would be the biggest increase since August 2013 and would go a long way in restoring some positive confidence within the market. Additionally, unemployment could have declined further in April to 5.4% marking it the lowest level recorded in last 7 years, while moving closer and closer to the range that the FED has described as full employment.

It will be interesting to see the effect of a positive report on equity markets and treasuries’ yields, as some analysts are already betting a substantial rebound in stocks should the Jobs Reports exceed expectations. Furthermore, this report will weight in the Federal Reserve’s timing for the largely anticipated interest rate increase, with the potential to tip the scale in favour of a “summer hike” should the report display declining unemployment and rising hourly wage rates.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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