US Markets Tepid with Payrolls Friday on the Horizon

Productivity, Employment Data Show Improvement   In an otherwise light day for US economic data, the Labor Department released two reports which provided further evidence of a healthy jobs market.  Nonfarm business productivity recorded a 1.3% annualized increase during Q4 2016, albeit lower than the previous quarter’s revised +3.5% rate.  The rise marks the second consecutive quarter of advances after declining in the three prior periods.  Overall, the 1.4% level is marginally higher than the average growth over the past decade and represents a 0.2% year-on-year improvement.  In a separate report, the number of Americans filing for unemployment benefits declined last week.  Initial jobless claims for the week ended January 28th totaled 246,000, below expectations of 250,000 and marking the 100th straight week of claims below the 300,000 threshold associated with a healthy labor market.  Investors are eagerly anticipating tomorrow’s release of the monthly jobs report, where median forecasts predict an addition of 180,000 to the nonfarm payrolls.

BOE Holds Monetary Policy Steady, Raises Growth Outlook
As expected, today the Bank of England announced it would be keeping its benchmark borrowing rate at its existing record-low level of 0.25% and maintain its current bond-buying program, representing the final decision from a trio of central bank meetings from around the globe this week, after the BOJ Tuesday and the Fed Wednesday.  The U.K. central bank also increased its growth forecast for 2017 and 2018, with the expectation that inflation reaches the target level of 2% within months, citing an accommodative fiscal stance, steady consumer spending, and an improving global economic environment.  An acknowledgment by some members of the Monetary Policy Committee that there is a strengthening case for a rate increase was recorded in the meeting minutes, along with noting the risks associated with Brexit.  BOE Governor Mark Carney expressed caution in saying “the stronger projection doesn’t mean the referendum is without consequence,” and explained that “The Brexit journey is really just beginning; while the direction of travel is clear, there will be twists and turns along the way.”  At the same time, Carney pointed to the possibility for a future policy tightening – “If we do see a situation where there is faster growth and wages than we anticipated or spending doesn’t decelerate later in the year, one can anticipate there would be an adjustment of interest rates.”  Following the meeting, the pound fell 0.7% against the US dollar to $1.2577/GBP, with the total depreciation of the currency against the dollar reaching 15% since last June’s Brexit vote.      

Heading into payroll Friday, all three major US stock indices fluctuated near even for the day, as the DJIA (-0.03%), S&P 500 (+0.06%), and Nasdaq (-0.11%) all traded within a tight band.  Treasury prices rallied at the onset of the session, with yields/swap rates falling 2-4 bps across the curve before paring gains to finish close to unchanged on the day.  The US dollar trimmed 0.2% against a basket of major currencies while crude oil prices similarly declined 0.10%-0.35%.