It’s NFP Friday, and the market mood is not too bad when we think that the major news in the wire point that the rapidly spreading delta variant is about to threaten the economic recovery sooner rather than later.
There are event cancellations, companies pushing back their plans to bring employees back to office and a clear shift in consumer behaviour.
Happily, the company earnings are relatively strong to keep investors from sliding into a new depression.
Yet, it’s important to gauge the risks of a fresh contagion crisis starts on businesses, as the overshoot in inflation significantly decreases the maneuver margin for the Federal Reserve (Fed) policy, and the Fed may not be as supportive as it has been in the first year-and-a-half of the Covid crisis for helping companies keeping their heads above water.
Still, one ‘good’ news is, if things get worse, we might well see inflation starting to ease and softer inflation could eventually give a window of opportunity to the Fed for keeping its policy loose enough to help companies survive another crisis. But that’s a stretched expectation and can not be taken as a basis for policy expectations.
For now, the major US indices are pricing in the strong company earnings rather than the rising delta worries, and even the possibility of seeing a soft NFP print doesn’t interfere with the bullish market mood.
But still, after Wednesday’s miss on private job additions in the US, investors are not walking light-heartedly to the NFP print. US futures are flat to negative, as although there is no significant correlation between the ADP and the NFP prints, a soft ADP figure inevitably dents the mood into the nonfarm payrolls.
The US economy is expected to have added 870’000 nonfarm jobs in July, slightly more than last month’s 850’000. However, the analyst estimates tend to be inaccurate these days, therefore, we could well see a number significantly higher or lower than the consensus of analyst estimates.
A strong figure should further boost appetite in US equities, even though I expect the energy and cyclical stocks trend behind the stay-at-home stocks due to the rising Covid worries. A soft figure, on the other hand, could hardly change the expectation that the Fed will announce bond tapering sometime between the end of this year and the beginning of the next, and the first rate hike in 2023. And that’s ok, it’s still some two years away from now, and things could change!
In the FX, we will likely see a strong figure boosting gains in the US dollar against the euro and apply an additional negative pressure on the EURUSD, which failed to clear the 1.19 resistance recently.
And the recent rebound in the US 10-year yield is now pressuring gold prices lower. One curious thing about the significant easing in the US 10-year yield was the fact that the yellow metal remained relatively unresponsive to it, hinting that the low US yields mostly boosted appetite in the better-paying stock markets. In this respect, the yellow metal has a better chance to break its 1790/1830 range to the downside, unless the US prints an abnormally low jobs data that throws the investor appetite against the wall.