Today's markets: US jobs shock sends shares down

Last week’s surprising US payroll figures continue to hit stock market sentiment this morning with shares in Europe following falls in Asia and the large drop in New York on Friday. Not even a weakening pound is enough to help the FTSE 100 which starts off the week down 0.3 per cent. Bourses in Paris and Frankfurt fell around double that.

As we thought might happen, the non-farm payrolls figure shocked traders with the US economy creating 256,000 jobs in December, substantially ahead of the 160,000 expectation. Any above-prediction number was going to send traders into a frenzy, but the scale of the beat has made many worried. The S&P 500 dropped 1.54 per cent, US Treasury yields rose, and bets rounded on there being only one cut this year, and that happening in September instead of July. In just one week we have moved from 2-3 cuts to one, such is the heat in the US economy. Yields rose on the more rate-sensitive two-year bonds as well as longer-dated ones.

Now, the data is of course all soft. But it doesn’t paint a pretty picture. Well, sorry, it does, jobs are of course a good thing, but markets are so driven by rates these days that they can’t get past the fact the rate cuts are good and anything else is bad. Of course, rates matter, but perhaps not to this extent. Pantheon Macroeconomics, which before the non-farm announcement said markets were already putting too much weight on it, says the data could be revised down, and non-farms are not as accurate as they used to be. We’re looking at a single data point instead of the trends. Seems a fair criticism, certainly given the reaction. The dollar rose on the back of this, with that and generally rising US rate expectations sending Asian shares down overnight.

The FTSE is down today despite the fall in the pound. Our own woes exist outside of the ‘what will the Federal Reserve do next’ microcosm. The pound is at a 14-month low versus the dollar as traders line up to bet on a weakening pound, given the overall state of the UK macro picture. Gilt yields continue to rise this week but not by the same margin as last Thursday. Short-dated yields are falling today but the 10-year is 4 basis points higher.

In terms of the week coming, it’s a little quieter on the soft economic data front so we might have calmer markets overall. We do have the UK’s inflation print on Wednesday, but right now markets aren’t even concerned about what the Bank of England does next, they’re just looking at Downing Street.

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By Taha Lokhandwala