Tom Porcelli, chief U.S. economist at RBC Capital Markets, said the report was so strong it meant the payrolls report on Friday would have to be unbelievably dire to deter the Fed from hiking next week.
The dollar stood firm in Asia on Thursday and bond yields spiked after super-strong U.S. jobs data made a rate hike a near certainty, while oil nursed bruising losses as U.S. stockpiles swelled past all expectations. With energy stocks on the run, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.25 percent. Australia’s main index eased 0.1 percent, while its resources sector fell almost 2 percent. Japan’s export-heavy Nikkei took heart from a softer yen and added 0.3 percent. Oil plunged 5 percent on Wednesday to the lowest this year as U.S. crude inventories surged much more than expected to a record, offsetting OPEC’s attempts to limit its output. There was a risk the retreat could squeeze speculators out of long positions, which are near a record, and lead to a downward spiral in prices.
If sustained, that could put downward pressure on inflation globally and endanger the entire “reflation” trade. In early trading, U.S. crude edged up 11 cents to $50.39, having shed $2.86 overnight. Brent crude was yet to trade after losing $2.81 to $53.11 a barrel. Wall Street was sideswiped by the rout in oil, with energy stocks losing 2.5 percent in their worst performance since mid-September. The Dow fell 0.33 percent, while the S&P 500 lost 0.23 percent and the Nasdaq added 0.06 percent. Interest rate-sensitive real estate stocks also took a hit after the ADP employment report showed private payrolls surged by 298,000 last month, far above expectations.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said the report was so strong it meant the payrolls report on Friday would have to be unbelievably dire to deter the Fed from hiking next week. “There is almost no number that would stop them,” said Porcelli. “It would take an extreme event for the Fed to take a pass at this point.” Indeed, he noted the ADP surprise meant there was a real chance payrolls could beat expectations, perhaps by a lot. “On the face of it, ADP is consistent with private payrolls of about 340,000,” he said. The current median forecast is for a rise of 190,000.
With a hike seemingly certain, and more likely over the year, yields on two-year Treasury notes climbed to 1.378 percent, the highest since August 2009. That widened its premium over German debt to a meaty 220 basis points, the largest gap since early 2000. That is a burden for the euro that is likely to only get heavier as the European Central Bank seems wedded to its super-easy policy. The central bank meets later Thursday and is considered unlikely to tighten until the latter part of this year or early 2018, a Reuters poll found last week. The single currency was stuck at $1.0538 in Asia on Thursday, well off a $1.0640 top hit early in the week. The dollar index was last up 0.1 percent at 102.150, close to a March 2 peak of 102.26. The dollar edged up to 114.52 yen, having been as high as 114.75. The firmer dollar pressured a host of commodities from copper to iron ore. Spot gold was nursing a grudge at $1,207.71 having struck a five-week low as higher interest rates raised the opportunity cost of holding the non-yielding metal.