In a recoil response of sorts to the sharp rally during the last week of January, markets began February by resuming a risk-off posture with equity and commodity markets falling sharply while safe haven assets received a strong bid. Other hallmarks of the past week were an aggressive deceleration of the strong USD momentum and a handful of key Fed economic data points as we look forward to indications of monetary policy trajectory.
In a stark reversal of the strong U.S. dollar trend, last week saw the U.S. dollar fall 2.59%, weakening against 85% of major currencies over the past week. Markets have repriced the positive interest rate differential between the U.S. and other markets in anticipation of fewer Fed rate hikes this year. The U.S. rate curve continues to price in a shallow hiking cycle of half a hike this year, one in 2017, and one in 2018.
The longest ever job creation streak in American history was sustained last week with January’s somewhat weak headline number of 151,000 new jobs, but it did contain several encouraging details including strong wage gains, increased participation, and lower long-term unemployment. Global manufacturing PMI reports highlighted continued weakness across the emerging markets which registered a tenth consecutive contraction, with China’s reading well below the ‘expansionary’ level of 50 at 48.4. U.S., Europe, and Japan all registered positive manufacturing PMI readings (approx. 52.3) albeit with weak underlying momentum. Japan’s manufacturing PMI readings are trending at two year highs. Fourth quarter U.S. productivity data released last week affirmed an alarming decelerating trend driven by rising wages and lackluster growth. Productivity levels are now approaching their lowest levels in modern U.S. economic history.
U.S. Treasury bonds have had a strong rally to start the year while high yield bond spreads have widened to over 800 basis points. The S&P dividend yield of 2.53% currently sits 0.50% higher than the 10-year U.S. Treasury yield of 1.85%, the highest spread since 2012.