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A stronger than expected ADP national employment change estimate yesterday (which came in at 692K versus forecasts for 600K) helped the US dollar strengthen versus its major counterparts, pushing the dollar index back towards recent highs in the 92.50 region. At the start of the new quarter, EURUSD, GBPUSD and USDJPY are all this morning trading at multi-month extremes, with EURUSD close to 1.1850, GBPUSD under 1.3800 and heading for 1.3750 and USDJPY vaulting above 111.00 to hit 111.50. According to ING, FX market price action shows how markets are “fully endorsing the Fed’s data dependent approach” (i.e. guidance which is based around seeing actual progress towards their employment and inflation goals in the data). Note that yesterday’s housing data was also stronger than expected, with pending home sales data for the month of May showing an 8.0% MoM rise versus expectations for a -0.8% drop. While the US dollar is heading into the next round of key US data releases today and tomorrow on a firm footing, the next two days will be “make of break” for the buck; a disappointing Friday NFP number, for example, is likely to send the DXY back under 92.00.
The reaction to the strong US data in other asset classes has been much more muted; bond markets are little changed versus recent ranges with 10-year yields still trading between 1.45-1.50% levels and US equities haven’t budged much, though E-mini S&P 500 futures hit fresh record levels above 4300 overnight but have since backed off to trade in the 4280s. Equity and bond traders seem more eager to wait to see what official jobs data on Friday is saying before making too significant of a re-alignment to economic recovery and Fed policy expectations. There is also a hefty dose of US data out today, which is likely also encouraging some market participants to keep their powder dry, including the latest weekly jobless claims report, construction spending for the month of May and the ISM Services PMI for the month of June. With equities at/close to record levels and bond yields remaining subdued and still close to multi-month lows, its seems that markets for now remain confident that the US economic recovery is set to continue and that, given this backdrop, Fed policy remains appropriate to manage to economic cycle optimally – if markets did not believe that Fed policy was going to tighten too quickly, you would likely see stocks a lot lower than they currently are.
Separately, the Asia session was a little more downbeat that we are seeing in US pre-markets; regional markets (like Indonesia) were weighed by bad Covid-19 news (the delta variant continues to spread, and lockdown restrictions are being tightened/remain tight across much of South East Asia) and Japanese Tankan and Chinese PMI data wasn’t great. Hawkish remarks from Chinese President Xi Jinping with regards to reunification of Taiwan with the mainland are also said to be weighing on sentiment in the region as this all feeds into heightened military tensions in the region. But just as this more downbeat sentiment has not been able to infect US pre-market trading conditions, it has not been able to hurt commodity prices either; crude oil prices have seen strong gains thus far during European trade with WTI up over $1.50 to above $75.00 (needless to say, fresh cycle highs) and Brent up just under $1.50 to trade close to $76.00 (also fresh cycle highs).
Reports that OPEC+, who meet today, will agree a deal that sees output increases of less than 500K barrels per day per month between the months of August and December are said to be supporting the complex. Market analysts had been expecting the cartel to agree to output hikes of about 500K barrels per day per month over the latter part of the year, so if these reports are true, the production hikes will be less than expected. Thus, the news is reinforcing the idea that crude oil markets are set to remain heavily undersupplied for the rest of the year. On OPEC+, UBS commodity analysts Giovanni Staunovo commented that “given the sharp demand increase we expect for this summer, we think the group will modestly increase production… Even so, the oil market will remain undersupplied”, before predicting that larger oil inventory declines will lift prices higher in the Q3 this year. Finally on commodities, silver and gold are both seeing modest gains on the day, with spot prices of the former trading in the $1770s and of the latter just to the south of the $26.50 handle, with conditions in precious metals set to remain subdued ahead of Friday’s US jobs report.
Returning back to FX markets; as noted above, recent USD strength has pushed a number of dollar majors back to multi-month extremes. On the day, however, we are seeing some underperformance in GBP and JPY (both down more than 0.2% on the session versus USD) and outperformance in NZD and EUR (both up about 0.2% versus the USD). The rest of the G10 is broadly flat, as FX traders await an incoming batch of US data releases. The final version of the June Eurozone Markit Manufacturing PMI survey was released this morning and saw a decent upside revision (to 63.4 from 63.1), a record high (suggesting manufacturing is expanding at a record pace), though the data showed firms seeing the steepest rise in raw material costs in well over two decades. Chris Williams, chief economist at IHS Markit, sums its up; “Eurozone manufacturing continued to grow at a rate unbeaten in almost 24 years of survey history in June as demand surged with the further relaxation of COVID-19 containment measures… However, the sheer speed of the recent upsurge in demand has led to a sellers’ market as capacity and transportation constraints limit the availability of inputs to factories, which have in turn driven industrial prices higher at a rate not previously witnessed by the survey”. Elsewhere, a somewhat downbeat Japanese Tankan survey released overnight has had little impact on the yen; according to Capital Economics, though the survey was not as strong as predicted by market participants, a further rebound in the survey supports their view that the Japanese economy’s disappointing start to the year won’t stop vaccines from driving a strong rebound later this year and that upbeat capital spending plans supports their view that business investment will soon recover more quickly.
The Day Ahead
Weekly US Initial Jobless Claims data is out at 1330BST and will be closely watched as usual, though note that the week during which time the data was collected does not correspond to the week when the US Bureau of Labour Statistics compiled the data for the official jobs report which is set for release on Friday. Nevertheless, evidence of a continued decline in benefits claimants will be taken positively by markets. Final US Markit Manufacturing PMI data for the month of June is then out at 1445BST ahead of the release of the more widely followed ISM Manufacturing PMI release at 1500BST. At the same time as that, US Construction Spending data is also out. After the US data is out of the way, the only other key event of the day to watch will be remarks from BoE Governor Bailey at 2000BST, but the pre-release of his remarks is already out and has not impacted sterling much (he outlined three reasons why the bank thinks inflation is set to be transitory but did reiterate that if it proves not to be then the bank is willing to act).
