By: Louis Portail
In the US, March non-farm payroll figures rose by 196,000 topping analyst forecasts, wage growth eased to 3.2% from 3.4% in February and the unemployment rate remained unchanged at 3.8 percent; a touch above the 49-year low of 3.7%. US equities edged higher following the news, but the market largely anticipated the jobs report, with the S&P 500 gaining just 0.2%. Friday’s gains marked the longest winning streak for the index since October 2017, with the S&P 500 climbing 15% since the beginning of the year. Although the report paints a positive outlook – the labour market appears strong and inflation remains low – Friday also saw the second-lowest daily trading volume for 2019, suggesting investors are reluctant to place large bets on the future, and raising doubts about additional upside.
Pound Sterling traded down 0.5% to US$1.3017 following Theresa May’s request for a three-month extension to the Brexit deadline. The uncertainty around withdrawal outcomes has seen the pound fluctuate within a narrow range – around US$1.31 – for the past month, as long-term investors focus on insuring themselves while refraining from making bets against possible outcomes. Analysts back the UK to remain in the EU until next year with 50% probability, with the odds of a no-deal Brexit hovering around 25%. Bank of England Governor Mark Carney, despite refusing to give exact probabilities of Brexit outcomes, has said the odds of an unplanned exit are “alarmingly high”. A no-deal Brexit could send the pound below US$1.15, a level unseen for more than 30 years, and one that would significantly threaten UK economic and financial stability.
The US 10-year Treasury yield grew to 2.538% on Friday following the jobs report before falling to 2.499%, with the gap between 10-year and 3-month yields narrowing to 7 basis points. The encouraging news of a strong labour market and lower-than-anticipated wage growth has partially eased fears of an impending economic downturn, particularly considering the weaker-than-expected data in February and the brief yield inversion in March. Despite President Trump again calling on the Fed to cut rates by half a percentage point, the report endorses the hold on US monetary policy changes for the foreseeable future.
Global bond funds have seen large capital inflows this week, with $11.4bn recorded for the week ending Wednesday, marking the 13thstraight week of positive inflows globally. As central banks ditch plans to raise rates this year, long-term Treasury yields have fallen as investors scramble to lock-in higher yields in anticipation of more dovish policy in the future. High-yield corporate debt has drawn a significant share of the inflows, signaling that investors still have an appetite for high yields and higher risk in the face of a reversal in central banks’ attitudes. However, the growth in bond funds also highlights the fact that markets remain wary of a slowdown in global economic growth.
Investors remain cautious in the leadup to the Australian election given the marked difference between both parties’ policies on franking credits and negative gearing. Australia’s sensitivity to global macro-economic trends means the election is unlikely to have a significant impact on the broader economy, however some specific companies are set to be affected by the election outcome. The opposition’s policies on negative gearing are likely to materially impact the major banks’ share prices, while changes to excess franking credits could see self-managed superfunds and retail investors rotate out of companies with large franking balances. While Labour is on track to win, the makeup of the upper and lower houses could see renegotiations on these policies, adding to investor uncertainty and making it difficult to price-in policy changes.