Thu, Oct 21, 2021 @ 18:49 GMT
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US ADP Employment Report In Focus

Market movers today

  • Final services PMIs for July will be released across a number of European countries and the US. With the end of lockdowns many euro area countries are seeing an accelerating service sector recovery, but with the spreading of the delta variant, some headwind on tourism, travel, and hospitality sectors will likely remain.
  • In the US, the ADP employment report will give some early hints about the jobs market situation during July, ahead of Friday’s non-farm payroll report. The employment index in the ISM non-manufacturing index will also be worth watching for clues on the prevalence of labour shortages.
  • In Norway, we get Real Estate Norway’s monthly house price statistics. We are generally looking for a moderate slowdown to the Norwegian housing market. However, Monday’s OBOS house price data revealed surprisingly strong price growth both nationally and in Oslo. That leaves some topside risk to our base case of roughly flat (seasonally adjusted) market in July. Either way we still look for Norges Bank to initiate its hiking cycle in September.

The 60 second overview

Risk sentiment: Overall risk sentiment was positive with equities gaining and broad USD declining. Yesterday was quiet in terms of new data releases and little news shook the markets overnight. Tensions between the west and Iran have risen somewhat as US is investigating a possible hijacking of a tanker near Oman. Oil prices fell slightly yesterday with Brent now hovering above USD72/bbl.

Yield outlook: The global bond rally calmed down and US yields stabilized yesterday. The US jobs report on Friday will be an important release to follow as the speed of the labor market recovery will be a key factor determining when Fed will begin its tapering process. We have adjusted our year-end forecast for the US 10Y yield lower to 1.70%, but still expect moderately higher yields on the back of more hawkish Fed. Read more in our latest Yield Outlook: Yields set to tick up later in 2021 as the US labour market improves and the Fed starts tapering, 3 August.

New Zealand: Unemployment rate in New Zealand fell more than expected to 4.0% in Q2 from 4.7% in Q1. The strong figure supported NZD overnight, as markets have now fully priced in the first hike by the Reserve Bank of New Zealand (RBNZ) in the upcoming meeting 18 August. RBNZ also yesterday announced plans to further tighten rules for mortgage lending to help curb the rapidly rising housing prices in the country.

Equities: Equities rose yesterday, sending S&P500, MSCI world and other indices to fresh new all-time highs. Despite equities have risen in July and the first days of August it’s a different leadership than we saw earlier in the year when macro momentum was accelerating. Lately, we have seen a defensive led outperformance, which is of course also partly backed by the drop in yields. However, it not the most rate sensitive sectors that have outperformed but instead a sector like health care has done very well. We think this shift towards semi-defensive sectors is a premature and argue we will see the cyclicals outperforming in Q3. This view is being supported by the earnings and earnings revisions we are seeing within cyclical sectors.

FI: The rally in the global bond markets took a pause yesterday with 10Y US Treasuries trading around the 1.17%-level and 10Y German government bond yield still testing -0.5%-level, while we wait for the US labour market report on Friday.

FX: AUD, NZD and NOK held up well yesterday despite commodity prices dropping back. Drop in broad USD likely helped. Noteworthy levels: EUR/USD held steady just below 1.19, USD/JPY traded close to 109 and EUR/GBP fell closer to 0.85.

Credit: Another day with muted movements in credit. iTraxx Xover widened 1bp (to 236bp) and Main was unchanged at 46½bp. HY bonds were unchanged and IG ½-1bp wider.

 

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