U.S.

Added 313,000 Jobs in February; Wage

Gains Cool to 2.6%
By
Sho Chandra
March 9, 2018, 8:30 PM GMT+7 Updated on March 9, 2018, 9:45 PM GMT+7

 January pay gain that spooked markets revised down to 2.8%

 Hiring strongest since mid-2016 as participation rate surges

The U.S. added 313,000 jobs in January beating the estimate of 205,000. Bloomberg’s Mike
McKee reports.

The U.S. economy enjoyed the biggest hiring spree since mid-2016 in February as workers
streamed in from the sidelines of the labor force, but inflation pressures remained muted amid
signs the pay gains that spooked financial markets last month haven’t taken hold.

Payrolls rose 313,000 in February, compared with the 205,000 median estimate in a survey of
economists, and the two prior months were revised higher by 54,000, Labor Department figures
showed Friday. The jobless rate held at 4.1 percent, the fifth straight month at that level. Average
hourly earnings increased 2.6 percent from a year earlier following a downwardly revised 2.8
percent gain.

U.S. stock futures and bond yields rose, as the report signaled the labor market remains strong
and will keep driving economic growth. The wage figures show a cooling from a pace that
spurred financial turbulence last month on concern that the Federal Reserve could raise interest
rates faster.

While the unemployment rate remains well below Fed estimates of levels sustainable in the long
run, the rise in participation suggests the presence of slack that would keep policy makers to a
gradual pace of hikes.
“This is a report that’s going to strengthen the argument of some of the doves on the Fed, that
people came back to the labor force last month -- that’s a positive sign for the U.S. economy,”
Alan Krueger, a Princeton University professor who served as chairman of the Council of
Economic Advisers under President Barack Obama, said on Bloomberg Television. “We’ll see
how long that can continue.”

For now, rising labor-force participation may be a factor holding down wage gains. The
participation rate increased to 63 percent, the highest since September, from 62.7 percent the
prior month, the biggest monthly gain since 2010. The number of employed people in the
workforce rose by 785,000, according to the report.

Powell’s Debut

Fed policy makers are widely anticipated to raise interest rates when they next meet March 20-21
in Jerome Powell’s first gathering as chairman. A bigger question is whether central bank
officials maintain projections for a total of three quarter-point hikes this year, or boost the
outlook to four.
Average hourly earnings rose 0.1 percent from the prior month following a 0.3 percent increase,
the report showed. In the 12 months ended in February, analysts had forecast a monthly gain of
0.2 percent and an annual increase of 2.8 percent.

Employees worked more hours last month, which also may have played a role in the wage
numbers. The average workweek for all private employees increased to 34.5 hours, from 34.4
hours. The initial data for January had shown a shorter workweek of 34.3 hours, which had the
effect of boosting average hourly pay

Hong Kong Sees Salvation From Asset

Bubbles in Currency Weakness
By
Justina Lee
March 12, 2018, 7:42 AM GMT+7

 HKMA has to buy the local currency if the band is breached

 Sustained gain in rates may finally tame housing frenzy

Normally, when a currency is falling, a simple step exists to revive it: raising interest rates. But
in Hong Kong there are no interest rates to raise, and that’s created problems.

Hamstrung because it ceded monetary policy to the U.S. Federal Reserve 35 years ago, the Asian
financial hub has had no choice but to watch as a decade of radical stimulus by a foreign central
bank sent money coursing across its borders. The inflows have jacked up prices on everything
from apartments to car park spaces.

The situation is on the verge of boiling over: Hong Kong’s dollar has weakened to a point where
intervention is about to become obligatory. And to politicians and anyone else concerned about
asset bubbles in the city, it couldn’t be happening at a better time.

“Why have home prices risen non-stop for 10 years? It’s not related to the economy. It’s a purely
monetary phenomenon,” said Raymond Yeung, an economist at Australia & New Zealand
Banking Group Ltd. in Hong Kong. “If Hong Kong rates don’t rise, it’s hard for asset prices to
correct.”
When the currency reaches the weak end of its band against the greenback, the Hong Kong
Monetary Authority will be compelled to buy Hong Kong dollars, thereby sucking up liquidity --
and finally lifting interbank rates that are lagging behind their U.S. equivalents. The widening
rate discount is why the currency has been falling.

The HKMA pushed the Hong Kong dollar further in that direction on Thursday when it issued a
statement ruling out issuing additional bills -- sales that previously have helped lift the exchange
rate. The currency fell as much as 0.1 percent after the comments, its biggest decline since
December. The Hong Kong dollar last traded at HK$7.8378, within 0.16 percent of the HK$7.85
level that marks the weak limit of the peg.

When the HKMA steps in to defend weak end of the band, the monetary base will shrink
gradually, allowing local rates to normalize, said Norman Chan, head of the HKMA. One-month
Hibor is more than 100 basis points below the U.S. equivalent of Libor, the biggest spread since
2008.

The market started pricing in expectations for higher rates after the HKMA’s statement. Twelve-
month forward points surged the most since December 2016 that day, and one-year interest-rate
swaps extended a nine-year high on Friday. The one-month interbank rate known as Hibor rose
the most since Dec. 1.
With reserves of $443.5 billion, the HKMA is not short of ammunition. Once intervention
begins, the pace can be sizable. Back in 2004, when rates were similarly lagging behind during a
period of Fed hiking, the HKMA bought $4.1 billion worth of Hong Kong dollars over two
months, helping drive the one-month Hibor up 86 basis points.

There’s plenty of cash to absorb. The city’s aggregate balance of interbank liquidity is still 100
times pre-crisis levels. It may also take a substantial increase in rates to knock the housing
market off course. But the risks from a sustained period of easy monetary policy in a buoyant
economy are mounting. In the Bank for International Settlements’ measure of the deviation of an
economy’s credit-to-gross domestic product ratio from its long-term trend, Hong Kong came
first in the world among 44 economies tracked, indicating unusually rapid debt growth in recent
years.

“The HKMA is willing to take the risk to show the rest of the world the Hong Kong currency
board can withstand depreciation pressure,” said ANZ’s Yeung. “We’ve seen inflows for many
years, but very seldom do we see outflows.”

FX Factors to Watch: Inflation Hawks

Quieted As Risk Rallies On NFP
Mar 10, 2018 5:38 am +07:00

by Tyler Yell, CMT, Forex Trading Instructor

Fundamental FX Factors In Focus:

 US yield curves look set for further jumps after aggressive flattening, may limit DXY weakness
 US Current Account deficit widening puts twin deficit in key focus
 Growth puts risk buyers back in the drivers seat

2017 was a year marked by constant surprise that stocks were not falling after the global political
landscape was shaken so aggressively in 2016 through multiple elections. So far, while 2018 has
had volatility spikes early on that fundamentally shook the comfort out of many investors, there
also appears to be a fulfillment of the new post-crisis and central bank intervention market.

Naturally, traders and investors have never come out of a market so heavily supported by low
sovereign yields that made borrowing cheap thanks in large part to central banks buying debt at
historic levels. However, inflation has become the key factor that some say is missing and
otherssay cannot rise without aggressively breaking the confidence that has marked recent leg of
the extended risk rally.

Unfamiliar with Key FX Fundamental Factors to watch? No worries, I created a primer for you
here
Fixed Income or sovereign bonds give traders a wealth of information that makes them
impossible to ignore if you’re trying to grasp capital flows and drivers of growth. As explained
in the primer piece, because fixed-income securities give investors fixed coupons (give or take a
return to par if purchased at a discount or premium if purchased after issuance in the secondary
market), they are uniquely concerned about inflation. When receiving a fixed series of payments
for a period of time, a rising rate of inflation is the second worst enemy aside from default to
investors.

Since 2016, global bond yields have been moving higher meaning that the securities themselves
are moving further away from par. Given the historic low in yields (premium in debt issuance)
seen over the last few years, the rise in yields and specifically, the flattening of yield spreads
over different tenors are causing investors to question where the next big opportunity lies.

Yield Curve (Blue Line) Falling Alongside Dollar Index (Orange Line)

Data Source: Bloomberg. Chart created by Tyler Yell, CMT

Non-Farm Payroll in the US Shows Inflation Concerns May Have Been Overdone

Goldilocks is a term used to describe a news release that shows an economy is running hot, but
not too hot for concern that would cause a central bank to sound an alarm. The traditional
headline number for Friday NFP showed the US added 313k jobs and outshone while the focus
was on the Average Hourly Earnings or Wage Inflation component. Such a number bodes well
for GDP growth with stable participation while wage inflation decelerated after January’s
aggressive rise.
Next week, US CPI will also shine a spotlight on inflation pressures, and whether they’re
increasing or diminishing.

The yield curve flattening above is known as bear flattening, which historically has been a
development where riskier assets have outperformed. Bear flattening often happens when the
short-end or in the yield curve used above known as, the US 2 year rate increases more than the
long-term or US 10 year rate. Typically, this is because long-term growth is in doubt when
compared to short-term growth or inflation drivers.

Friday’s CFTC Commitment of Traders report showed the bear flattening trend has the full
support of institutions that sold bonds on the back end of the yield curve with more aggressive
shorts showing up in the belly of the curve.

Trade Wars Turn Focus on Widening US Deficit As US’ Borrowing Needs Rise

Data Source: Bloomberg

The drop on the chart above shows a move away from a balanced budget of the US Current
Account. A current account deficit means an economy is funded externally. The key point is that
the funding needs of the US are only accelerating. Add to that, there remains confusion on who
will bear the brunt of the tariff’s signed into law by President Trump this week, and specifically
if the large buyers of US Treasuries (those who keep yields from skyrocketing) will keep buying
issuances especially if they feel they are on the wrong end of the Tariff’s.

Either way, the week ended on a positive note, as evidenced by the Nasdaq trading to fresh
records. At the beginning of the week, there was what could have been the start of a trade war,
concerns of US inflation and uncertainty around how the ECB might shake the boat. 5-days later,
implied volatility continues to fall showing investors no longer remained concerned after
learning of potential carve-outs to the largest exporters of steel like Canada and Mexico.

Growth Dynamics Continue To Remain Supportive

Debt and supply are only an issue when growth cools to the point that they cannot be serviced. A
proxy for global growth is Emerging Markets, and while they have been cooling off lately a
string of positive developments have come to the scene.

Citi Economic Surprise Index – Emerging Markets

Date source: Citigroup, Bloomberg

The surprise factor of Emerging Market economic data points are the strongest relative to
expectations in nearly a year. It’s too early to make a trend of this, but traders should understand
that a legitimate shock rise in growth of Emerging Markets, whether through commodity demand
or organic growth could keep the buying of risk in vogue for the foreseeable future.

FX traders may decide to go straight to Emerging Markets, similar to what was argued in this
article on the Mexican Peso or to high-beta G10 FX, which Ichimoku may be showing the worst
is over if support holds. The most recent Ichimoku Report can be found here.
Stocks in Asia Rally After U.S. Jobs; Yen
Advances: Markets Wrap
By
Adam Haigh
March 12, 2018, 5:08 AM GMT+7 Updated on March 12, 2018, 10:46 AM GMT+7

 Nasdaq climbed to record high on Friday, S&P 500 rose 1.7%

 Jobs report showed strong U.S. growth, inflation contained

Stephen Wood, Russell Investments Chief Market Strategist, discusses growth prospects for
Asia.

Asian stocks gained as trade-war concerns took a backseat to economic optimism following a
U.S. jobs report Friday that showed the American economy continued to strengthen without the
prior month’s rapid wage gains that stoked inflation fears.

The MSCI Asia Pacific Index of stocks climbed, with markets from Tokyo to Sydney higher.
The S&P 500 Index rose Friday and the Nasdaq Composite Index soared to a fresh record high
after U.S. non-farm payrolls data topped forecasts. Ten-year Treasury yields were at 2.90
percent. The yen rose on the back of political concerns surrounding Japan’s Finance Ministry,
run by a stalwart ally of Prime Minister Shinzo Abe, whose administration has endorsed a weak
yen.
Strong economic indicators have bolstered the Federal Reserve’s case for higher interest rates
and given fresh impetus to the bull market in global equities that’s now nine years old. A slew of
data out of China this week and readings on U.S. inflation and retail sales could provide more
insight into the strength of global growth. Appetite for risk assets was boosted at the end of last
week as U.S. President Donald Trump accepted an invitation to meet North Korean leader Kim
Jong Un and the narrower-than-expected tariff plan from the White House eased speculation of a
trade war.

In Japan, debate is emerging over the political future of Finance Minister Taro Aso, after his
ministry reportedly altered documents tied to a controversial land sale. Aso has been Abe’s
deputy since he took office in December 2012, and is seen as a key backer of the Abenomics
program.

Deutsche Bank’s Torsten Slok discusses the U.S. February jobs report.

Source: Bloomberg

Elsewhere, Bitcoin climbed back toward $10,000 after sliding 18 percent last week. Crude oil
traded nudged higher above $62 a barrel after last week’s advance.

Terminal users can read more in our markets blog.

Here’s what’s coming up this week:

 China data on industrial production, retail sales and fixed-asset investment all out on
Wednesday are likely to point to slower growth, according to Bloomberg Economics
forecasts. Retail sales probably rose 10 percent from a year earlier, while industrial
production growth is expected to have slowed to 6.2 percent.
 Key indicators for the Fed dominate the economic agenda in the coming week. Headline
inflation may have edged up to 2.2 percent in February from 2.1 percent, though
consensus before Tuesday’s report is for core inflation to remain at 1.8 percent. The other
main data point will be Wednesday’s retail sales numbers, which are expected to show a
significant rebound from weather-induced declines in January.
 New Zealand GDP data is out Thursday.

These are the main moves in markets:

Stocks

 The Topix index gained 1.3 percent and the Nikkei 225 Stock Average jumped 1.4
percent as of 12:45 p.m. in Tokyo.
 Australia’s S&P/ASX 200 Index rose 0.8 percent.
 The Kospi index in Seoul gained 1.2 percent.
 Hong Kong’s Hang Seng Index advanced 1.5 percent. The Shanghai Composite Index
rose 0.5 percent.
 S&P 500 Index futures rose 0.4 percent. The underlying gauge jumped 1.7 percent
Friday.
 The MSCI Asia Pacific Index added 1.5 percent.

Currencies

 The Bloomberg Dollar Spot Index fell 0.1 percent.

 The yen rose 0.2 percent to 106.64 per dollar.
 The Aussie dollar gained 0.3 percent to 78.65 U.S. cents, its highest in about two weeks,
after Australia was exempted from U.S. metal tariffs.
 The euro added 0.1 percent to $1.2321.
 The pound was little changed at $1.3859.

Bonds

 The yield on 10-year Treasuries rose almost one basis point to 2.90 percent, extending a
four basis point advance on Friday.
 Australia’s 10-year bond yield rose three basis points to 2.81 percent.

Commodities

 West Texas Intermediate crude was up 0.1 percent to $62.11 a barrel. It climbed 3.2
percent on Friday.
  Gold fell 0.1 percent to $1,322.64 an ounce.

Low Australian Inflation Isn't Going

Anywhere Soon, Westpac Says
By
Michael Heath
March 12, 2018, 8:11 AM GMT+7

Australia’s low inflation is becoming firmly entrenched, Westpac Banking Corp.’s Bill Evans
says, underscoring his forecast that interest rates will stay on hold until 2020.

Underlying inflation will likely post a fifth year at or below the bottom of the Reserve Bank of
Australia’s 2 percent to 3 percent target by the end of 2019, according to forecasts of both Evans
and the central bank. Governor Philip Lowe has kept interest rates unchanged at a record-low 1.5
percent since taking the RBA’s helm in September 2016.

“It is reasonable to argue that Australia is experiencing a structural fall in inflation,” said Evans,
chief economist at Westpac. “Arguably, without the risk of overheating the housing market,
interest rates would have been even lower in Australia in recognition of this structural fall and
the disappointing progress in restoring inflation to the target range.”
Shortly after becoming governor, Lowe told lawmakers that RBA officials aren’t “inflation
nutters” and were prepared to tolerate consumer-price growth’s slower return to target in order to
avert further rate cuts that would distort asset values. At the time, Sydney and Melbourne house
prices were soaring and only subsequent regulatory intervention to limit interest-only loans and
lending to investors cooled the east coast property market.

While weak consumer-price growth in a historically inflation-prone economy like Australia’s is

unusual, it is part of a worldwide trend that Lowe partly attributes to an increasingly
interconnected global labor market. That’s discouraging developed-nation workers from asking
for larger pay increases -- due to concerns about job security -- and contributing to weak wage
growth across the globe.

The U.S., where the jobless rate is well below estimated full employment, is only now seeing
signs of faster wage growth.

“With rates on hold in Australia and the U.S. Federal Reserve continuing to raise rates,
Australia’s cash rate is set to fall below the Federal Funds rate by March,” Evans predicts. “By
end 2018, it is set to be 63 basis points below the Federal Funds Rate, and by end 2019, 112
basis points below.”
Traders are a bit more optimistic, pricing in about a 50-50 chance of the RBA hiking in
December and a stronger possibility in February 2019.