European markets saw another day of gains yesterday, though for most of the day it was a bit of a struggle, with the turnaround only happening in the last hour of trading, as US markets shrugged off their early day malaise to turn higher, with the Dow once again posting another record high.
The likes of the Russell 2000, and to a lesser extent, the Nasdaq lagged behind, with the US small cap index closing the day unchanged, after being over 1 per cent lower at one stage during the day, as we look ahead to today’s jobs report.
“Asia markets have had a mixed week, with the latest China trade data for April building on what has been a fairly lacklustre start to the year from a GDP point of view, even as trade data has looked quite strong,” CMC Market UK’s chief market analyst Michael Hewson said this morning.
Demand for exports saw a 30.6 per cent rise in March, however that was largely driven by exports of PPE and other medical related products, as well as weak base effects from a year ago when the Chinese economy was locked down.
“This is likely to slow in the coming months as vaccines continue to get rolled, however new variants and the rise in infections across Asia these past few weeks is still likely to keep a floor under these,” Hewson added, pointing out that April exports were expected to see a rise of 24.1 per cent, but came in at 32.2 per cent.
Imports, which also surged in March by 38.1 per cent, again with base effects playing a part, maintained their resilience as a combination of weak comparatives to a year ago and improving demand saw a gain of 43.1 per cent, beating expectations of 42.5 per cent.
“Amongst the items that saw decent demand was commodities like iron ore and copper, while the rebound in Chinese retail saw demand for beauty products and cosmetics improve as well,” Hewson noted.
With Asia markets having a decent session, today’s European open is expected to follow suit with a positive open in the wake of the latest China trade data, with the main focus on the US jobs numbers for April.
Before that we have the latest UK construction PMI for April which is expected to round off a trifecta of 60+ readings, as the beginning of Q2 gets off to a flier for the UK economy.
“On Tuesday we saw manufacturing post a reading of 60.9, while services saw 61, while the construction sector is expected to round off a hattrick with 62.1, and a seven-year high,” Hewson said.
This optimism over the UK recovery prompted the Bank of England to upgrade its 2021 GDP forecast to 7.5 per cent from 5 per cent yesterday, and also adjust the amount of its weekly asset purchase program down to £3.4bn, not that you’d know it from the way the pound reacted.
Despite a slowdown in the US jobs market at the end of last year, we’ve seen an impressive rebound with jobs gains of 166k, 468k in January and February, and then a stunning 916k in March.
“There is no question that the huge amount of fiscal support that has been pushed into the US economy over the last four months has helped in this regard, with $900bn agreed at the beginning of January, followed by a much bigger $1.9trn stimulus which was signed off in March,” Hewson said.
“Combined with the accelerated vaccination program that is continuing apace across the US, along with a slowdown in the rise in virus cases, hospitalisations and deaths, which is also helping in terms of the US recovery, expectations for today’s April’s job numbers now similarly elevated,” he added.
Average estimates are for a number in the region of 1m especially since weekly jobless claims are also trending lower dropping below 500k a week yesterday, and a post lockdown low, while the unemployment rate is expected to fall further, from 6 per cent to 5.8 per cent.
“This is very welcome especially since the participation rate has remained steady and actually edged up to 61.5 per cent in March, and which is expected to move higher today, suggesting early signs that more disincentivised workers are returning to the workforce,” Hewson said.
Some Fed officials have indicated that they want to see clear evidence of the participation rate moving much higher before considering any change in monetary policy. It was notable from Fed chair Jay Powell’s most recent press conference that the FOMC wanted to see consistently good jobs numbers over a matter of months, with constant references to “substantial further progress”.
“This also helps to explain why US 10-year yields are now 10bps lower from where they were a month ago when the March jobs report dropped,” Hewson said.
The Fed will also want to see underemployment fall further. In March we declined to 10.7 per cent from 11.1 per cent, so further progress will be welcomed here.
“All of this still needs to be set in the context of a participation rate of 63.4 per cent over a year ago, but putting that to one side the US economy is going in the right direction, if recent ISM reports from the last couple of months are any guide. These should also be reflected in much stronger payrolls numbers as we head further into the summer months,” Hewson concluded.