USD shrugs NFP GBP fears referenda

The US April jobs report encapsulates the ongoing divergence between sustainable employment trend and inadequate wage growth. The reaction in the US dollar and bond yields further reduces the probability of a summer Fed hike. The 223K headline rise in NFP was overshadowed by a 39K downward revision in the February and March payrolls. The dip in the unemployment rate to fresh seven-year lows at 5.4% –especially as it is accompanied by the rise participation rate to 62.8% from 62.7%, bolsters the argument of Fed hawks for a 2015 rate hike, thereby maintaining a 2-way market in USD and yields.

Ominous Yields-Stocks Divergence

The recent rise in yield resulting from dumping bunds by managers worried about Eurozone CPI exiting four months of negative figure was compounded by possible signs of oil-driven reflation currents, which spilled over to other G10 bond yields.

Stocks traders will inevitably ask about their tolerance for the rise in bond yields at a time when: US H2 GDP is under pressure to catch up after a dismal Q1; capex and durable goods are outweighed by share buybacks and; persisting deflationary currents from China.

The bund-driven rise in global bond yields may be the German version of the Fed-tantrum for the Fed.

Rally first, ask questions later

Sterling loses a 1/3 of its post-election rally as the questions of EU Referendum and SNP’s expansion cast a shadow over the future of Britain’s Union and UK’s role in the European Union.
UKIP’s rise, Labour’s decline and LibDem’s downfall ensure that Brexit-related becomes an additional risk premium embedded into the pound and gilts.

Some economists have argued for the benefits of Brexit (savings in contributions to EU budget and maintaining trade agreements bilaterally), but none of the major credit agencies agree as they focus on the negatives (delaying and halting investments, businesses exiting UK and UK suffers rising tariffs from EU).

The SNP’s landslide victory means a slow and long return to the preoccupations seen ahead of the Scotland Independence, only this time backed by more established political support. The lingering risk of another independence vote coupled with devolution provisions may not be an immediate threat to sterling, but could re-emerge sooner than many anticipate.

Sterling bulls will be sustained by prolonged expansion in services, manufacturing and construction sectors as well as an accommodating central bank, but question marks over low earnings growth and an expanding trade deficit may not be ignored.