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Strong weekly jobless claims data on Thursday lent US equity markets a helping hand; initial claims fell under 500K per week for the first time since the onset of the pandemic, continuing their recent downwards trend, in a sign that the US labour market has continued to recover at an accelerating pace heading into May. Thus, the S&P 500 managed to rally back above the 4200 level ahead of the close and futures have gradually built on these gains overnight (E-mini S&P 500 futures currently trade about 0.2% higher just above 4210). Yesterday’s strong labour market data may have served as an appetiser for what is to come on Friday; consensus analyst expectations are for today’s official US labour market survey for the month of April to show that more than one million jobs were created in the country on the month. Further evidence that the US economy has kicked into a higher gear in recent months is likely to be risk appetite supportive given that the Fed is willing to look through near-term economic momentum given that the even if the jobs market experiences strong gains in the coming months, it is still likely to be well below its pre-pandemic levels for some time.
Meanwhile, European equities have gotten off to a decent start to the session (Stoxx 600 +0.7%) as they play catch up to gains seen on Wall Street following the yesterday’s European close. German stocks (DAX +1.3%) are performing particularly well following a combination of strong German trade and industrial production data. Elsewhere, Asia equities were mostly positive, boosted by solid trade data out of China, though in the end Chinese stocks closed lower, weighed by “hawkish” commentary on the US/China trade relations front; US and Chinese negotiators will reportedly soon hold talks to review the Phase One trade deal and the Biden administration is likely to continue Trump’s ban on Chinese investment. Moreover, News reports suggest US Secretary of State Blinken speech in the UN today will be hawkish on China.
Elsewhere, European bond markets have seen yields move a little higher this morning after “hawkish” rhetoric from an ECB policymaker highlighted the possibility that the bank may slow its QE buying next month. Martins Kazaks, Governor of Latvia’s central bank and a member of the ECB Governing Council, said the bank might decide to reduce the pace of its PEPP bond buying in June if borrowing costs remain low. US bond markets, meanwhile, are subdued ahead of US data, with 10-year yields going sideways either side of the 1.60% mark and with 10-year TIPS yields going sideways just above -0.9%.
In terms of commodity markets, crude oil prices are flat amid a lack of fresh fundamental drivers and ahead of key US data. WTI is currently flat in the upper $64.00s. However, industrial metals continue to surge; Copper was up another 2.3% this morning, with LME prices hitting a fresh record high at $10325 per tonne. Newswires are attributing the rise to demand from speculators and industrial buyers “on the back of rosy economic data as Western economies recover from the pandemic” (says Reuters). Gianclaudio Torlizzi, partner at Milan consultancy T-Commodity, commented that “we’re in uncharted territory right now and the market is a bit frothy… The industrial players are in panic mode since there’s not much supply, but once stock levels in industrial warehouses start to stabilise, together with the credit slowdown in China, that should pave the way for some consolidation lower”.
Precious metals are also performing well; gold is set for its best week in six months after surging above resistance at the $1800 level yesterday (it currently trades a little higher on the day just above $1820, up about 2.7% on the week). According to Commerzbank analyst Carsten Fritsch, “the technical picture has brightened after gold finally broke above $1,800… This could lead to follow-up buying by speculative, technical investors and could also lead to more conviction amongst ETF investors”. Fritsch adds that “the Fed has made pretty clear that it will not react even after strong US data and the monetary policy stands for the time being… So, even a strong US payroll would not have a meaningful negative impact on gold, but a weaker one would be bullish for gold”.
Turning to FX markets; ING note that we have seen quite a few hawkish central bank meetings in emerging markets this week, (Brazil, Russia, Czech Republic…) and that, in the G10 space, the currencies of central banks that are opening talking about or even engaging in policy normalisation, such as NOK and CAD, are generally seeing their currencies outperform (note, however, that these two currencies are also getting a boost from oil). With regards to the US dollar, however, ING comment that “even though the US is at the top of the list of those countries closing output gaps and in theory needing to withdraw loose policy, the Fed’s new monetary policy strategy has muddied the waters in this relationship… (and) despite a generally positive set of US releases this month, US 10-year real yields have dropped around 10bp this month – largely on the view that the Fed remains on the sidelines”.
In that regard, given the experience of the past month or so, during which time the US Dollar Index has dropped from around 93.00 to current levels under 91.00, a very strong April US jobs report (set for release at 1330BST) may not come to the US dollar’s aide. Rather, if it boosts risk appetite, it might even hurt the dollar on account of its status as a safe-haven currency. If that does end up being the case, the level to watch for the DXY will be last week’s lows just under the 90.50 mark.
In terms of the rest of the G10, things are mixed and mostly subdued in the lead up to crucial US jobs data, as is typically the case (markets are in the pre-NFP lull!). On the stronger side is SEK (up over 0.3% on the day versus USD) and GBP (up just under 0.2% on the day versus the buck). EURSEK has pushed back to the south of 10.15 and is again below its 21DMA. GBPUSD, meanwhile, has ground back above 1.3900 and is broadly little changes since yesterday’s BoE meeting. There does not seem to be much behind SEK outperformance. Meanwhile, Vaccine woes as the UK Health Department advised under 40s to take alternative jabs to the AstraZeneca vaccine appear not to have impacted sterling sentiment much. Domestic politics might be helping sterling (the ruling Conservative Party picked up a decent win in the Hartlepool bi-election, further widening their majority in the House of Commons and dealing a blow to the opposition labour party), while politics with the EU is being shrugged off (PM Johnson and President Macron will hold talks over the Jersey fishing dispute).
Turning to the underperformers; CHF, NZD and CAD are all down about 0.2% on the day versus the dollar. The Swissie is softer despite a lower than expected Swiss April unemployment rate; USDCHF is looking to move back up to probe the 0.9100 level ahead of US jobs numbers. The kiwi is softer despite an uptick in NZ inflation expectations with NZDUSD having failed in its bid to overcome the 0.7250 overnight. The Loonie is softer seemingly amid some profit-taking as USDCAD rises modestly back from yesterday’s multi-year lows under 1.2150 ahead of key Canadian jobs data for the month of April, which is out at the same time as the US numbers (1330BST).
The rest of the G10 majors (EUR, JPY, NOK and AUD) are broadly flat versus the buck; EURUSD is currently consolidating around 1.2075, USDJPY just above 109.00 and AUDUSD around 0.7775. Euro traders have not taken as much optimism from strong German trade and industrial production data as have equity traders and did not really show any reaction to seemingly hawkish commentary from ECB Governing Council member Kazak, who this morning suggested that the ECB could decide to slow the pace of its bond buying in June (its not clear if he meant going back to the pre-March pace of roughly EUR 60B per month, or a more pronounced slowing). Yen traders have shrugged off confirmation of the extension of state of emergency orders in Tokyo, Osaka, Kyoto and Hyogo until the end of the month. Finally, Aussie traders have not paid much heed to strong Chinese trade data (perhaps given ongoing China/Aussie tensions), nor to a broadly as expected RBA Statement on Monetary Policy following Tuesday’s rate decision, which saw the bank’s economic forecasts get an upgrade (though wage growth was noted to be weak).
The Day Ahead
As noted, the main event of the day will be the US April jobs report at 1330BST. Canadian jobs numbers are out at the same time. FOMC member Barkin is then to speak at 1400BST. Further, but much less eye-catching US and Canadian data is up at 1500BST in the form of US Wholesale Sales (for March) and Canadian Ivey PMI (for April). Oil traders will then be keeping an eye on weekly Baker Hughes rig count numbers at 1800BST and US Consumer Credit data (a good gauge of the amount of debt being taken on/paid off by private US individuals) may turn a few heads at 2000BST but is unlikely to trigger much of a meaningful reaction.
