Thu, Jul 29, 2021 @ 11:40 GMT
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Cautious Trade Ahead Of US Non-Farm Payrolls

European bourses are edging lower in cautious trade on Friday. The weaker start comes following a tech-led decline on Wall Street overnight and as investors look ahead to the US non-farm payroll jobs report later today.

Strong US data on Thursday points to a roaring US economic recovery, fuelling bets the Fed will start tapering support. The weak handover from the US set trading in Europe off on the back foot.

However, indices in Europe are trading only mildly lower and continue to hover around record highs reached earlier in the week.

Data yesterday revealed that business activity surged in May as several pandemic restrictions were eased.

Retail sales for April were less encouraging, declining by 3.1% MoM. This was sharply down from March’s 3.3% increase and fell short of the -1.2% decline expected. Retail sales are often considered a proxy for consumer demand, which is key for determining inflation trends. However, critical parts of the region were in lockdown, battling a third wave of Covid in April, which would explain the disappointing numbers. Non-food products plunged -5.1% on the month, reflecting the lockdown restrictions.

Sector-wise, airlines are under pressure after the UK added seven more countries to the red list and removed Portugal from the green list. The move by the British government raises doubts over the possibility of a strong summer recovery in international travel.

Attention is now turning firmly towards the US jobs report. Expectations are for 650k jobs to have been created in May. Unemployment is expected to tick lower to 5.9% from 6.1%. Last month’s report was disappointing, with just 266k jobs added. May’s reading will help determine whether the weak April print was a one-off or the start of a new trend.

The ADP private payroll report, initial jobless claims and the employment subcomponent in the ISM services PMI all point to a stellar report. A strong labour market, combined with elevated inflation, could prompt the Fed to start tapering support to the economy, a concern that dragged stocks lower in the previous session. With this in mind, a better-than-expected jobs report could drive equities lower, particularly high-growth tech stocks, which are more sensitive to interest rate expectations.

FX – USD trades at three-week high

The US dollar is extending gains on Friday for a third straight session, driven higher by a trio of stronger economic data points ahead of today’s all-important non-farm payroll.

The US dollar has traded lower across most of 2021, reflecting the Fed’s ultra-easy monetary policy. However, recent strong economic data points to the US economy roaring back into life, fuelling concerns that the Fed could start to tighten policy sooner. So far, the official view from the Fed is that any near-term rise in inflation is transitory, and therefore the present levels of support should be maintained. The question is whether this view will start to change with a solid jobs report.

The euro is slipping lower under the strength of the US dollar; however, the fundamental picture remains supportive of the common currency. The third wave of Covid is passing, and restrictions are easing. However, this has mainly been priced in.

 

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