Further gloom on the US jobs front failed to keep global equity markets from ending the week with a flourish as hopes intensified for a speedy passage of President Obama’s economic stimulus package.
US non-farm payrolls fell by 598,000 last month - the biggest drop since December 1974 - taking the jobless rate up to 7.6 per cent, the highest for more than 16 years. January’s decline marked the first time since records started in 1939 that job cuts had exceeded half a million in three successive months.
“The escalating superlatives in the US unemployment gloom increase the likelihood that the Senate will pass the $920bn fiscal stimulus package,” said Ashraf Laidi, chief market strategist at CMC Markets.
“Although the stimulus package would justify new record borrowing by the US Treasury, markets are focusing on the impact on the economy from an aggregate demand perspective.”
Earlier in the week, hopes that the global economy might be near to bottoming out were triggered by surveys showing that pace of deterioration in the service sectors of the eurozone, US and UK was declining, and by strong manufacturing and bank lending data in China. A big rally for the Baltic Dry Index - a measure of shipping costs for dry bulk commodities - also helped fuel hopes that China might see an early economic recovery.
Meanwhile, concerns over issuance continued to weigh on longer-dated US government bonds, although the pace of decline slowed slightly from that seen in recent weeks - even as the Treasury announced a record $67bn quarterly refunding next week.
The yield on the 30-year Treasury rose 7 basis points over the week to 3.67 per cent, while the 10-year note climbed 12bp to 2.96 per cent. Over the previous week, the 10-year yield rose 26bp and the 30-year 35bp. Both are around a full percentage higher than December levels.
Christoph Rieger, fixed income strategist at Dresdner Kleinwort, acknowledged that the issuance numbers kept on getting bigger but argued that demand for Treasuries would keep up with supply and absolute yield levels would fall to new lows later this year.
“Should the heightened supply threaten to push yield levels much higher, it would counter the US authorities’ intention to stimulate private demand and one can be assured that the Fed would not dawdle in its intention to start purchasing longer-dated US Treasuries in order to keep yields low,” he said.
By contrast, short-dated German bonds enjoyed their biggest weekly rise for a month amid mounting speculation that eurozone interest rate cuts would resume next month.
The European Central Bank left borrowing costs unchanged at 2 per cent at its policy meeting this week but Jean-Claude Trichet, president, made some downbeat remarks about the economic outlook and acknowledged that financial markets expected a rate cut in March.
“The ECB’s tone on the real economy has turned somewhat to the worst,” said Carsten Brzeski, economist at ING. “It is now talking about a significant downturn not just a slowdown.”
The yield on the rate-sensitive two-year Schatz fell 13bp over the week to 1.39 per cent as the 10-year Bund yield rose 6bp to 3.37 per cent. That left the spread between the two maturities at its widest level since the ECB was founded in 1998.
Mr Trichet’s comments came as dire German industrial production and factory orders data highlighted the dire manufacturing environment in the eurozone’s biggest economy.
The 10-year UK Gilt yield edged up 2bp to 3.72 per cent and sterling hit a two-month high against the euro as investors welcomed the Bank of England’s decision to cut interest rates by 50bp to a record low of 1 per cent.
Elsewhere in the currency markets, the euro touched a two-month low against the dollar as fears about the eurozone’s exposure to central and eastern Europe were heightened by a downgrade to Russia’s credit rating.
Equities enjoyed a strong week across the board. In Europe, the FTSE Eurofirst 300 index rose 3.4 per cent cent. By midday in New York, the S&P 500 was on track for a rise of 4.4 per cent – only its second weekly advance so far this year– as banks advanced ahead of proposals by Treasury Secretary Timothy Geithner to strengthen the financial system.
In Tokyo, the Nikkei 225 Average managed a gain of 1 per cent. Chinese stocks put in a strong performance, with the Shanghai composite index rising nearly 10 per cent amid optimism about the outlook for the country.
In commodities, that optimism helped base metals prices rally strongly, with copper climbing 13 per cent this week and aluminium up 9 per cent.
But oil fell back as demand fears resurfaced with the publication of the US employment report. US crude sank below the $40 a barrel level to trade 4.5 per cent down on the week. Gold dipped 1.6 per cent as safe haven buying showed signs of waning.
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