US equity markets came under very modest selling pressure during Thursday’s session, with the S&P 500 dropping about 0.4% to close around 4190 and the Nasdaq 100 dropping about 1.0%. The fall will not concern many investors, given that major US indices still trade within a few percentage points of recent all-time high levels and that the retracement from this week’s highs is small compared to the recent rally from last month’s lows. Traders/analysts cited a few reasons as to why stocks fell yesterday; strong US data (ADP and ISM Services PMI, both for the month of April, both beat expectations) which is touted as adding upside surprise risk to today’s US labour market report, which, if strong, could increase the pressure felt by the Fed to begin its pivot towards asset purchase tapering sooner rather than later. On which note, analysts also cited Wednesday’s surprise announcement from the Fed that they will begin winding down their portfolio of corporate bonds acquired at the onset of the pandemic as a negative (the Fed intervened in corporate bond markets as part of its wider intervention to maintain financial stability at the start of pandemic). The Fed’s decision to wind down its credit holding is being seen by some as a signal that further policy normalisation (i.e. tapering) is in the pipeline sooner rather than later. All of the above might well be reading too much into things and an overreaction to what was ultimately a rather small move lower in still very much subdued market conditions. US bond markets are equally subdued in pre-data trade, with 10-year yields currently around 1.62%, after yesterday’s modest rise from just under 1.60% in tandem with lower stock prices. Today’s US labour market report will of course be the main driver of risk appetite today and probably also over the coming weeks. Ahead of the release of this data at 1330BST, US equity index futures are flat, with E-mini S&P 500 futures trades around 4190 still.
Turning to commodities; crude oil prices remain supported close to recent highs, with front-month WTI futures currently consolidating just to the north of the $69.00 handle, which corresponds to modest on the day gains of about 20 cents or 0.3%. Brent is around $71.50 per barrel, up a similar margin. As is the case with other assets classes, trade is subdued ahead of key US economic data and things have fallen quiet in terms of fresh oil-specific fundamental catalysts. Elsewhere, gold saw a bout of selling pressure yesterday which saw spot prices drop to lows in the $1850s from previously above $1900, though spot prices are this morning consolidating around $1870 and moving sideways ahead of US data. Profit taking/position-squaring following strong gains in May ahead of key risk events was cited by some traders as the reason for the drop, while the above noted strong US data and surprise Fed credit facility tapering announcement were cited by some as gold negatives in the same way as both of those developments also allegedly weighed on stocks (i.e. by signalling a faster pivot towards QE tapering from the Fed). As is the case with all other major asset classes today, US jobs data is the make-or-break event of the week and perhaps for the rest of the month.
In terms of FX markets, things have been a little livelier than in other asset classes (namely stocks and bonds) over the past two days. After the US Dollar Index broke back to the north of the 90.00 level on Wednesday, it was given further upside impetus from a stronger than expected US ADP national employment gain estimate for the month of May (which analysts say raises expectations for a strong NFP number on Friday), as well as from a record high ISM Services PMI survey headline index number (also for the month of May). Note also that some analysts also cited the Fed’s unexpected Wednesday announcement to begin winding down its credit market purchase holdings as a dollar positive, given that it feeds into the “Fed soon to pivot towards asset purchase tapering” narrative. The DXY now hovers around 90.50 and today’s NFP number is seen as make or break with regards to its recent recovery from under 90.00 and prospect of rallying back to 91.00.
Turning to the dollar major counterparts and taking a look at the dollar majors; it’s a subdued picture this morning, with none of the major G10 currencies deviating more than 0.2% stronger or weaker on the session thus far versus the buck. Subdued trade like this is no surprise given that markets are well in the typical pre-NFP lull. In wake of the data, expect US dollar flows to dominate, with the exception of for the USDCAD pair, given USDCAD traders will also have Canadian jobs data to contend with (out at the same time and US jobs data), which could complicate the pair’s reaction. At present, USDCAD continues to trade just above 1.2100, up about 0.2% in pre-NFP trade despite slightly higher crude oil prices. As to the other major G10/USD pairings; EURUSD is consolidating just above 1.2100, having slipped back from around the 1.2200 level on Wednesday. Similarly, GBPUSD is currently supported just to the north of the 1.4100 level and probing the bottom of this week’s approximate 1.4100-1.4200 range. USDJPY, meanwhile, is trading sideways just above 110.00, having jumped from around 109.50 lows yesterday. Finally, AUDUSD is around 0.7650 at fresh roughly one-month lows after dropping from the mid-07700s in recent days and NZDUSD is around 0.7150, having also dropped to fresh one-month lows from the mid-0.7200s in recent days.
The Day Ahead
As noted, the big event of today and indeed the month of June is the release of the official May US jobs report at 1330BST. According to ING, “after yesterday’s strong ADP employment release, consensus for today’s NFP is probably for a 700-800,000 increase in jobs in May”, though the bank’s US economics team sees downside risks to that number “as employers continue to struggle to find workers”. “Such an outcome would support the position of the doves on the FOMC that the Fed still needed to be patient and would not be rushed into a decision on tapering at the FOMC meeting on 16 June… (a) scenario (that) should continue to see the dollar gently offered across the board” the bank posits. Conversely, in the case of a much stronger than consensus NFP number, ING think that the DXY could push back to the north of the 91.00 level amid upside in the policy-sensitive 5-year part of the US treasury yield curve. A sharp spike in US yields on the back of a stronger than expected NFP number is likely to see commodity currencies (NOK, AUD, MXN, ZAR) suffer the worst amid a strengthening dollar, the bank thinks. In terms of how other asset classes might react; a weaker NFP number is likely to be stock and gold positive, while a stronger number is likely to be stock and precious metal negative, given the inverse relationship of both asset classes to bond yields, which are likely to fall on a weak report but rise on a strong one.
Elsewhere, as noted, CAD traders will be on notice for the release of May jobs data out of Canada, also at 1330BST. This will complicate the USDCAD reaction, with traders of that pair needing to weigh up the relative strength of both the US and Canadian jobs reports in determining how the pair is going to react. In terms of other data releases of note; US Factory Orders data for the month of April is out at 1500BST, as is Canadian Ivey PMI for the month of May, with neither likely to garner too much focus. Then there is just the Weekly Baker Hughes US rig count release at 1800BST, which energy traders will keep half an eye on.