Market movers today
A quiet start to the week in terms of data releases. The Euro Area Sentix Index will be released for August and markets are looking for indications that the weakness in July’s leading indicators has persisted into August. In addition, Manufacturing PMI will be released for Norway.
Later in the week, the key data release will be the US July CPI on Wednesday. Lower gasoline prices point towards inflation pressure easing to 0.3% m/m/8.8% y/y, but the focus will be on the development in the underlying core measures. Following last week’s strong jobs report we continue to see risks tilted towards faster inflation and increasing pressure on Fed to continue with a third 75bp hike in September. On Friday, markets will also be following the University of Michigan’s Flash Consumer Sentiment survey for August, and especially the longer-term inflation expectations component.
The 60 second overview
July jobs report: Against expectations of weakening jobs growth, the non-farm payrolls surprised to the upside as 528 thousand new jobs were created in July. The growth in employment was very broad-based, and the June figures were also revised slightly higher. Labour shortages continue to push wage inflation higher, as labour force participation declined to 62.1% (from 62.2%) and average hourly earnings rose 0.5% m/m/5.2% y/y. Even though the latest JOLTs job openings data does point towards easing labour demand, overall labour market conditions remain very tight as the unemployment rate reached its pre-pandemic low at 3.5%. The combination of strong employment gains and fast wage inflation supports the case for further Fed tightening, and we continue to expect another 75bp hike at the September meeting. US 2y yields rose by around 15bp following the strong report, and market now prices in around 70% probability for the 75bp hike.
US politics: Last night, the US Senate passed a bill dubbed the ‘Inflation Reduction Act’, which aims to both increase spending into green energy and lower prescription drug prices, as well as decreasing the budget deficit by hiking corporate tax rates. Overall, if the bill is signed to law, it is expected to reduce US fiscal deficit by around USD 300bn, or 1.2% of the current GDP. The reduction in deficit will, however, be split over the upcoming decade, so the near-term impact on inflation will likely be very limited given that Congressional Budget Office’s baseline forecast for the US fiscal deficit for next year is 3.8% of GDP. In addition, the slight reduction in deficit will partly be offset by new spending from the Chips and Science Act passed in late July. That being said, the two bills do address some of the longer-term vulnerabilities that western economies have faced over the past couple of years related to inflation, supply chains and energy, and thus they could provide the Democratic Party a boost in support ahead of the mid-term elections later this year.
Equities: Global equities slightly lower on Friday but the main equity story being the comeback for value stocks. The NFP report brought back the inflation and central bank scare with higher yields and an even more inverted yield curve. The sign of economic overheating from the NFP report sent energy, materials and financials higher while rest of the sectors were lower. The equity story temporarily back to what we saw the first five months of the year but despite the value outperformance on Friday it still lost 1.5% relative to the growth sectors last week. The US performance on Friday, Dow +0.2%, S&P 500 -0.2%, Nasdaq -0.5% and Russell 2000 +0.8%. Asian markets are mixed this morning and the same goes for the western futures with European ones slightly higher and US ones slightly lower.
FI: Treasury yields jumped 10bp in the 10y area on the US labour market report that saw more than double the new jobs than consensus expected. Markets repriced central bank expectations, in particular raising the odds for a 75bp rate hike at the September meeting. While US yields saw an idiosyncratic jump on the release, the European session saw a more gradual rise in yields which accelerated after the jobs market report. 10y Bunds rose 15bp on the day to stand at 0.95%. The Dec22 Euribor contract rose 10bp (yield). Markets have priced in just above 100bp until year end (€STR). Bund ASW rose above the 90 mark again.
FX: Broad USD rebounded on Friday following the strong US jobs numbers. EUR/USD dropped below 1.02 and USD/JPY rose above 135. Oil prices dropped last week, but EUR/NOK was largely unaffected and stayed below the 10.00 level.