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It was a decent session on Wall Street yesterday. The S&P 500 ended the session up 0.6% for a new record close and its futures are this morning trading around the 4420 level ahead of US jobs data. The Nasdaq 100 and Dow also posted 0.6% and 0.8% respective gains, with the former (which typically has a negative correlation to bond yields) rallying despite a move higher in US government bond yields, which has carried across into this morning’s pre-market trade. US 10-year yields broke back above the 1.20% mark yesterday, having spent the prior two session languishing beneath the psychological level, and have this morning pushed above the 1.25% mark. 10-year TIPS yields (inflation-linked yields), meanwhile, are now trading at -1.07%, up 8bps from Thursday’s opening levels around -1.15%. The move back to record highs in US stocks and the rebound in bond yields is being attributed by market commentators to a fall in weekly initial jobless claims, which dropped to 385K last week from closer to 400K the week before. However, this is still above the lowest post-pandemic weekly initial jobless claim number of 364K, which covered the last week of June. Indeed, over the past three or so months, weekly initial jobless claims have broadly stayed within a 360K-420K range, implying momentum in the labour market has waned over this period. Markets seemed to take more optimism from a new post-pandemic low continued claims number, which fell under 3M for the first time since April 2020 (“normal” pre-pandemic levels are usually around 1.6-1.7M). Economists expect today’s US jobs report, which is the main event of the week and likely has the ability to set the tone for markets for the rest of the month until the Fed’s Jackson Hole Central Bank event, to be robust. But there is a large degree of uncertainty about the what the employment change number (NFP) might be; estimates range from 350K to 1.6M. The median figure is 870K, similar to number of jobs added in the month of June.
Turning to FX; the combination of a decent weekly jobless claims report, the rise in US real yields and arguably quite hawkish remarks from FOMC Vice Chairman Richard Clarida earlier in the week (when he talked about how he sees the Fed’s conditions for rate hikes to begin being met by the end of 2022) is supporting the dollar this morning. The DXY is up 0.2% and currently trading in the 92.40s. A strong jobs report could inject the momentum needed to send the DXY back towards recent highs around 93.00, analysts suspect. Some analysts suggest the dollar might even still be able to rally on an NFP number that is slightly below the market’s very lofty expectations. Data that signals good progress in the US labour market could reinforce expectations for QE tapering and rate hikes from the Fed that could benefit the dollar versus its low yielding counterparts like EUR, JPY and CHF, given central banks in those countries (the ECB, BoJ and SNB) are not expected to tighten monetary policy for many years. EURUSD this morning trades just above the 1.1800 handle, down 0.2% on the day and having dropped back from prior weekly highs of closer to 1.1900 – some have cited weak industrial order data out of Germany this morning as weighing on the euro.
USDJPY and USDCHF, meanwhile, are both very slightly in the green amid tentative pre-jobs data trade around 109.75 and 0.9075 respectively. Elsewhere, risk sensitive AUD is down 0.2%, with AUDUSD having dropped back under 0.7400 and NZD and CAD are both flat, the former now consolidating in the 0.7050 region, having failed to test the 0.7100 level earlier in the week. Nonetheless, NZDUSD is on course to snap a five-week losing streak with a gain of roughly 1.2%, during which time it has rallied from earlier lows close to 0.6950, boosted by a strong Q2 jobs report and a hawkish announcement from the RBNZ regarding plans to further tighten macroprudential policy on mortgages, which have together solidified expectations that the RBNZ will hike interest rates by 25bps later in the month. The Aussie, meanwhile, did not pay too much attention to remarks from RBA Governor Lowe overnight, with the Governor welcoming the weaker AUD, though stressing that AUD weakness in not a monetary policy. Elsewhere, GBP is modestly lower, but GBPUSD is still above 1.3900, supported by modestly hawkish signals from yesterday’s BoE rate decision.
Finishing up by taking a quick look at oil prices; they saw a modest rebound during Thursday’s session, with WTI bouncing from the $68.00 level and some positive momentum has translated into Friday’s session, with WTI currently trading around the $69.50 mark. Nonetheless, oil prices remain on course for their worst weekly performance since March; if WTI closed out the session at current levels, it would end the week with losses of just under 5.0%. As noted in previous market briefs this week, concerns about the international spread of Covid-19 (particularly in China) have triggered fears that many parts of the less well vaccinated world (i.e. outside of North America and Europe and mostly in Asia) may have to continue to tighten restrictions on movement, damaging fuel demand, in a bid to control the virus. In terms of the latest out of China; the country reported 124 cases on Friday, the highest daily tally in the current outbreak, which is being fuelled by a rise in locally transmitted cases (i.e. implying that Covid-19 is “on the loose in China”). Elsewhere in Asia, Thailand and Malaysia both also reported record daily infection rates on Friday. Asia Pacific economies, with their generally low infection rates, remain highly vulnerable to the disruptive impact of the virus and lockdowns.
The Day Ahead
The all-important July US jobs report will be released at 1330BST. The report has the ability to impact market expectations as to when the Fed will announce and begin its QE tapering timeline. Some have suggested that an underwhelming report might thus be good for risk assets like US equities, as it would push back the timeline to monetary policy normalisation. Canadian jobs data, also for the month of July, will be released at the same time, and could trigger choppiness in CAD.
