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Market Update
Markets are unsurprisingly in quite a subdued mood as the all-important US labour market report approaches, which could determine whether or not the Fed decide to speed up their QE taper in December or not. US equities are roughly flat in pre-market trade, with the S&P 500 close to 4580 having recovered from the low 4500s during yesterday’s session. The VIX remains at fairly elevated levels around 27.00 (versus pre-Omicron levels under 20) as traders continue to expect a pick up in volatility in the near future. Whilst US data will be worth watching, particularly for FX and bond traders as it could inform QE and rate hike expectations for 2022, the main theme for equities (and all assets) remains the Omicron variant.
It is still far too early to make any conclusive statements about the characteristics of the new variant, but, based on preliminary data/anecdotal experience in South Africa, where it is now dominant; 1) it is much more transmissible, 2) it can more easily infect the vaccinated and those with natural immunity to prior infections (a South Africa study said break-through infections were three times as likely) and 3) the symptoms seem milder for most age groups (aside from very young children). As more information comes in over the coming weeks, participants will be able to better project the spread of the virus and impact it will have and will thus be better able to make economic projections. The best case scenario would be for infections to prove very mild and health authorities actually being happy to let the virus spread so it dominates other, more severe variants of Covid-19. That could see risk on and a repricing of hawkish central bank expectations.
Back to markets this morning; the US yield curve is fairly subdued with the 2s close to 0.62%, the 10s close to 1.43% and the 30s around 1.75%. European yields are also subdued, with the German 10-year close to recent lows just above -0.40%. WTI is higher in the $68.00s and only saw a momentarily negative response to OPEC+’s decision to press ahead with prior plans to hike output in January by 400K BPD. Analysts saw this as a vote of confidence by the cartel in the demand outlook and as a statement by them that recent downside is overdone. Bullish bank commentary this morning from Goldman Sachs talked about how the oil bull market is set to continue and how the recent dip is a big buying opportunity.
In terms of FX, things are mixed. The Aussie and Kiwi are at the bottom of the G10 performance table despite a lack of catalysts as key areas of support are broken pre-NFP. Most other G10 majors are broadly unchanged, with the DXY holding above 96.00, EURUSD just above 1.1300, GBPUSD between 1.3250 and 1.3300 and USDJPY holding just under 113.50.
Day Ahead
The main event of the coming session is of course the release of the November US labour market report at 1330GMT. The median bank forecast is for the headline NFP number to come in at 550K, which would mark a slight improvement from October’s 531K reading. The unemployment rate is seen falling to 4.5% from 4.6%. The YoY pace of growth in Average Hourly Earnings is seen rising slightly to 5.0% from 4.9% last month. Alternative labour market data from November/the official jobs report survey period has for the most part been strong; ADP’s estimate of employment change came in at 534K on Wednesday, the employment components of the ISM and Markit PMI surveys (not including the ISM service PMI, which is yet released) all showed slight improvement versus October, weekly initial jobless claims in the November survey week was lower versus the October survey week and Challenger job cuts fell to a fresh low since 1993.
A strong labour market report would endorse the Fed’s hawkish shift this week; the bank indicated a higher degree of concern about inflation (and has dropped the word transitory) and strongly hinted at a faster QE taper, while members have sounded very bullish on the labour market and state of growth and played down the risk of Omicron. A strong report is likely and expected, thus may not trigger too significant a reaction, but would underpin some of the recent moves seen in bond markets (short-end and real yields rising in anticipation of a more hawkish Fed). This could also feed into a stronger dollar, which has struggled to recover in recent days after falling in response to Omicron this time last week.
At the same time as US data is released, the Canadian labour market report, also for November will be out and will be closely scrutinised by the CAD traders. Attention will then turn to the next key US release of the day in the form of the ISM Service PMI survey, which is out at 1500GMT. That should also be strong, in keeping with the string of strong survey results we have already seen for November. Thereafter, the focus will return to headlines about Omicron and things will likely quite down into the weekend.
