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Markets ahead of today’s key US jobs report
Unsurprisingly, markets are subdued, having entered the typical pre-US jobs data lull. Ahead of the release, market participants will likely continue to keep their powder dry to see how things shake out following the release of the data. US equity index futures continue to trade at record high levels, with E-mini S&P 500 futures comfortably supported to the north of 4300 after the index broke above the psychological level during yesterday’s session, aided at the time by broadly decent US data (weekly initial jobless claims continue to fall back towards pre-pandemic levels and the ISM survey was healthy, albeit with the prices paid subindex hitting fresh record highs). European equities, meanwhile, trade positively in catch up to the gains made on Wall Street after yesterday’s European market close. Turning now to bond markets; further bull-flattening is being observed in the US treasury curve ahead of the key jobs data release (i.e. longer-term yields are falling faster than short-term yields), with 10-year yields down about 3.5bps to under 1.45% again versus unchanged 2-year yields at 0.26%. The move is being driven by a drop in real yields, with US 10-year TIPS down about 3bps and under -0.9% for the first time in over two weeks.
This is helping precious metals; gold is at highs of the week in the upper $1780s, but the gains are modest when you look at the losses sustained in wake of last month’s hawkish FOMC meeting, which sent gold careening under $1800 from the $1860s. Gold is likely to remain subdued ahead of NFP. Sticking with commodities, crude oil is seeing some modest profit taking after big gains were made yesterday on OPEC+ optimism; chatter yesterday was that OPEC+ might agree to output hikes of less than the expected 500K barrels per day per month over the coming months. WTI surged above $75.00 and currently remains supported above this psychological level. However, no deal has yet been reached and talks are set to resume today; there are reports that some OPEC+ countries want to change the baseline from which output cuts are calculated which would increase output, though crude oil price action is not suggesting much concern about this. Crude oil prices will be watching the US jobs data, but the outcome of the OPEC+ meeting will be the main driver.
Finishing with FX; the US dollar looks a little firmer ahead of the release of US data with EURUSD and GBPUSD both down about 0.2% on the session to the low 1.1800s and under 1.3750 respectively. Conversely, USDJPY is a tad softer and has pulled back from above 111.50. Other G10 pairs are mixed; the Loonie is outperforming amid recent strength in crude oil, though USDCAD cannot seem to break back under 1.2400 ahead of jobs data, whist AUD and NZD are subdued, with AUDUSD just above 0.7450 and NZDUSD just above 0.6950 respectively. It is a US holiday on Monday (Independence Day), so post NFP release pre-weekend position squaring might be a little more prominent than usual today.
NFP Preview
The median estimate of economists is for the US labour market to have added 700K jobs in the month of June, taking the unemployment rate lower to 5.7% from its current 5.8%. Ahead of the release of the official labour market report at 1330BST, alternative gauges as to the health of the labour market have been mixed; ADP’s estimate for employment gains in June was strong at 692K, but economists note that in recent month, this has tended to overestimate actual jobs gains and thus in the minds of some supports the case for a weaker job gain. Challenger layoffs for the month were at their lowest since June 2000 and Consumer Confidence on the month rose to a fresh post-pandemic high with the employment indicator (the difference between the jobs “plentiful” and “hard-to-get” component) was also stronger than in May. Meanwhile, Homebase employment data was also strong during the week when the Bureau of Labour Statistics conducted their nationwide survey to produce this month’s jobs report. All three thus support the case for a strong jobs report. Other employment indicators show less strength, including the weekly jobless claims report on NFP survey week (initial jobless claims and continued jobless claims both saw a surprise rise on the week) and business surveys (like the ISM manufacturing survey released yesterday and Markit Services PMI survey released earlier in the month) point ongoing difficulty in filling vacancies. Attention will not just be paid to the headline NFP number, but also to changes in the participation rate and how this impacts the unemployment rate, as well as changes in the U6 unemployment rate (a broader read of underemployment) and in average hourly earnings.
How markets might react
Dollar and FX – A much stronger than expected jobs report would almost certainly be dollar positive given that it would support the case being pushed by the more hawkish members of the FOMC for monetary policy normalisation to occur sooner rather than later. In the days following a strong jobs report, the dollar’s gains would likely be highest against the currencies of central banks where monetary policy expectations are much more dovish than for the Fed (EUR, JPY, CHF) and weakest against the currencies of central banks who are more hawkish than the Fed (i.e. EM currencies where the central banks are already tightening, NOK, CAD and AUD). Conversely, if a much weaker than expected jobs report undermined confidence in the speed of the labour market recovery on the FOMC, this will strengthen the argument to be patient in the move towards policy normalisation and would likely weigh on the US dollar somewhat.
Stocks – A stronger than expect jobs report might weigh initially on stocks if it translates immediately into increased concerns that the Fed might tighten monetary policy “too quickly”. However, stocks were broadly comfortable with the FOMC’s recent hawkish pivot (there was some initial selling but then the dip was aggressively bought, and stocks have since been back to record levels). Equity investors seemingly took the view that a somewhat more proactive Fed when it comes to tightening monetary policy would ultimately lead to a better economic outcome (i.e. not allowing the economy to overheat which could promote a boom then bust cycle) and a lower terminal interest rate (i.e. the Fed wouldn’t need to hike rates as much to cool the economy over the course of the next few years). Thus, markets could show a similar reaction to a strong jobs report (maybe a dip, which could again be bought over the coming days). Alternatively, a strong report might boost optimism about the economic recovery, which might support stocks from the get-go, though it seems more likely that equity investors will be focused on the Fed’s reaction function to the data, rather than the data itself – if that is the case, a bad or mediocre jobs report is likely to boost equity market sentiment given that it would support the case for continued Fed patience with regards to policy normalisation.
Bonds – A much stronger than expected jobs report, if it supports the case for more prompt Fed monetary policy tightening (i.e. a shorter timeline to taper QE then start lifting rates), would likely put upwards pressure on short-end US yields (like the 2-year yield). The impact on long-term yields would likely be more nuanced; simple logic says more hawkish Fed equals higher yields, but as we saw after the FOMC’s recent hawkish surprise, long-term yields fell. This was likely a reflection of the fact that markets are betting that more proactive Fed will help keep inflation in check and prevent the economy from heating up too much (i.e. lowering growth, but also reducing the risk of a boom/bust cycle) – both factors which keep long-term yields low. Strong jobs data thus might provoke a similar reaction in long-term bond yields, albeit after an initial spike higher (we did have an initial spike higher in long-term yields in wake of the hawkish FOMC). Meanwhile, weaker than expected data put pressure on yields and a mediocre report would likely not do that much to change the market dynamic.
Commodities – Crude oil’s reaction is likely to be similar to that of the stock market, though if strong data did push stocks lower (on hawkish FOMC concerns), the hit to crude would likely be lessened by the fact that strong jobs data indicated strength in the US economy, which supports the ongoing global demand recovery (and undersupply) narrative that has been so support of crude prices in recent months. Meanwhile, while bad data could support crude in tandem with stocks, the upside might be limited amid disappointment about the implications a weaker than expected US labour market has on expectations for crude oil demand in the US. Turning to gold; precious metal market participants will be trading the Fed’s reaction function to the data rather than the data itself (as always, to be fair). That means stronger than expected data (which supports the argument for a more hawkish FOMC) would likely be gold negative and weaker than expected data would likely be gold positive (supporting calls for a more patient/dovish FOMC).
Worth a mention – One key X-factor that likely continues to distort US jobs data is ongoing enhanced unemployment benefits which continue to be paid out in the majority of US states. Opponents to the policy argue that the payments, which in many cases give unemployed low-skill workers a comparable or even higher weekly income that what they would get by actually working, are a key reason as to why the US is seemingly facing a labour shortage right now (i.e. people choosing to stay home and make the same or even more money than they would by working). The states that axed the benefit programme in June might thus see a sharper uptick in payrolls that the states that didn’t (something watching out for). If this is the case, it would support the argument to ending the programme sooner rather than letting it run to September as planned – if this was the case, we could then see the pace of jobs gains increase. It seems unlikely this would be the case, however, so it seems likely that the labour market may continue to face shortages over the next few months, distorting the jobs data. As far as market participants are concerned, if job gains over the coming months undershoot expectations, this might thus not be taken as a sign of labour market recovery weakness, rather just a sign that benefits continue to distort things.
Elsewhere on the economic calendar…
The US and Canadian trade balance data for the month of May is set to be released at the same time as the US labour market report. The latter will likely rise back towards record high deficits of above $70B on the month, while the former will likely remain close to zero. The release of both will be overshadowed by the US jobs data. ECB President Lagarde is also scheduled to speak from 1330BST. Canadian June manufacturing PMI is out at 1430BST, followed by US factory orders for the month of May at 1500BST, neither of which are likely to garner much attention. Finally, crude oil traders will take note of the latest weekly Baker Hughes rig count report out at 1800BST.
