Relief rally was the main trading theme for Asian markets on Monday after the report on non-farm employment dispelled concerns about US economic growth, further bolstered expectations of accelerated inflation and four rate hikes in 2018.
South Korean KS11 grew by 1 percent, the Australian stock index added 0.7 percent due to the growth in shares of mining companies that anticipate that Australia will be crossed out from the Trump tariff list. The Japanese Nikkei jumped 1.5%, discounting the speculations about involvement in corruption of Prime Minister Shinzo Abe, as investors considered those rumours weak (or perhaps unreasonable) for the resignation of the chief architect of Abenomics.
There has been left no trace about inflation concerns after NFP report showed US economy added 313,000 jobs in February, but wages slowed to 2.6% after a jump to 2.9% in January. Nevertheless, the January wage growth gift for US economy proved to be transitory and medium-term paycheck will return to growth at a moderate pace. Unemployment retreated to 4.1%, but remains at a record low and is expected to reach 3.5% this year.
There was no immediate increase in wages, but a strong increase in jobs in February lays the foundation for accelerating inflation in the labour market this month. Obviously, stagnating wages means that the growing demand for labour is more than offset by supply, or in other words, jobs are created for low-skilled workers, who make up the majority of the unemployed. The elasticity of wages for labour demand is high since companies do not observe shortages of low-skilled labour, they are easily replaceable, and workers do not have “negotiating power” when it comes to working contracts. Data also showed that the level of participation in the labour force grew stronger than expected, so the demand for labour was offset by an increase in this indicator.
The progress in employment gains tempered by a slowdown in wages growth has slightly cooled the ardour of traders betting on four rounds of Fed’s policy tightening this year. Reaching a peak of 90.2%, the probability of a rate hike in March according to CME futures fell to 88.8%, indicating that the NFP report was perceived by investors with caution rather than with enthusiasm. While the Fed’s dot plot for 2018 points to three rate hikes and the market demonstrates consent with this forecast. Do not forget that the tariff wars unleashed by Trump have very mixed consequences on economic growth and inflation so holding onto the Fed is now the best strategy without trying to outrun it.
The US stock markets closed in positive territory with more than 1.5% gains in average, DOW index reacted with the growth of 1.77%, S&P 500 showed an increase of 1.74%, high-tech index Nasdaq became the leader of growth among major indices, adding 1.79%. Over the past week, the indices recovered an average of 3.5%, trying to erase the recent drop by 10%.
Investors sold the dollar on Friday – climbing to the level of 90.35 the currency collapsed to 90 level as the risk appetite increased and investors rushed to the stock market. The yield on 10-year Treasury securities returned to a local maximum of 2.9%, indicating that investors remain very optimistic about the behaviour of consumer inflation this year. The US currency became the leader of the decline among the major currencies on Monday, as investors are ready to invest in more risky assets in foreign markets, reducing dollar positions in the portfolio. This week, the dollar is likely to be held in the red zone, precisely because of the growing appetite for risk and the flows of capital from the US to emerging markets. The increase in consumer inflation in the Chinese economy from 1.5% to 2.9% also convinced the investor to think less about the risks.
Investors have reduced their positions on the Japanese yen after news that Trump is ready to hold a meeting with North Korean leaders on nuclear disarmament. This was the first significant progress in resolving the geopolitical dilemma and success of the meeting could significantly weaken the influence of geopolitics as a factor of demand for the yen as a safe haven asset.
The growth in industrial production and construction in the UK turned out to be worse than forecast, the data showed on Friday, but the trade deficit decreased due to a decline in exports to the EU. British currency advanced against the dollar, however, GBPJPY dropped, which primarily indicates that US dollar has lost in appeal since weak data on British economy will change expectations for BoE rate hike to «no-hike», which is a sell signal for the pound.
The oil market has a chance of recovery, as strong inflation in China and its prospects in the US allows black gold buyers to rely on the spiral of “inflation-oil prices», fueling bullish commodity cycle speculations. In addition, US firms have pleased the market with a reduction in drilling rigs for the first time in two months by 4 rigs to 796 units. This week may turn out to be very favourable for the prices with the return of $ 70 per barrel scenario.