2nd July - NFP Day
- Jul 2
- 3 min read
In terms of geopolitics, there was not much movement between Iran and the US, with talks still being carried out through intermediaries, and the final plan for the management of the Strait of Hormuz continuing to be a sticking point. Oil, however, is flowing through the Strait at present, and oil prices are continuing to fall, with Brent Crude falling below $72 yesterday and US oil falling below $68 this morning. As oil prices continue to fall, optimism continues to rise for the prospect of the FOMC's dot-plot plans no longer being needed.
The biggest news of the day is the NFP release scheduled for 1:30 pm UK time, which will help shape the next few weeks of price action and guide the market on how the US economy is dealing with the fallout from the energy shock. Apart from the inflation figures themselves, this looks to be one of the most consequential news events in some time and should have a significant effect on the market.
Forex
The USD was firmer on the day going into today's NFP print, as markets prepared themselves for the release later today. Yields were mixed, with the 10y easing towards 4.4% as inflation expectations continue to drift lower. Should we get a weak NFP print today, there is every chance the market will shift expectations away from a hawkish FOMC to a more neutral one, which could signal some significant USD weakness over the next week or so.
The USD/JPY seems to have reached a critical stage, as it continues to sit at levels not seen since the 1980s. Depending on the NFP print, a resolution to this story could come today.
Outside of the USD and JPY, the AUD & NZD gave back some of their early week gains yesterday as markets moved risk-off in advance of NFP, though this strength could also have been consistent with the quarter-end repositioning we discussed yesterday, with the move in markets on Wednesday giving a more accurate picture of the currencies' momentum.
The EUR was weak on the day, whilst the GBP showed strength against most currencies. With the growing confidence in a smooth and orderly transition in Prime Minister, along with new PM-in-waiting Burnham's comments displaying a toned-down and less left-wing rhetoric, the political uncertainty around the GBP seems to have largely dissipated and transitioned into support for the currency. The EUR seems to be struggling for confidence in the market, possibly thanks to the GBP's relative strength. Those investors seeing higher rates in the UK and less uncertainty may move their money into the GBP, comparing similar currencies in the GBP & EUR and deciding that currently the GBP is a better bet.
Indices
The two-day tech rally reversed a little yesterday, thanks to the opening of Q3 and some conservative positioning ahead of the NFP release. The Dow held up best, dipping just 0.03%, while the S&P 500 fell 0.22% and the Nasdaq dropped 0.66%.
As mentioned yesterday, the rally was concentrated in the tech stocks that had been struggling for a week and was flattered by the quarter-end positioning. Yesterday, tech stocks fell whilst the Dow held firm. This has even been echoed by the well-respected Jeremy Siegel. He argued that with crude and commodity prices falling, the case for further Fed hikes has "effectively disappeared this year," and he sees not a broad correction but an internal realignment, with capital rotating from the mega-cap tech giants into cyclical, value-oriented sectors, concluding this broadening of leadership is "typically a sign of a healthier bull market rather than a weaker one." This is exactly the rotation thesis we have been putting forward, the slow balloon deflation rather than the sudden pop.
NFP today will be an interesting wrinkle in this story. Would a weak print pump the balloon back up, or would the trend continue no matter the figure?
Precious Metals
Metals continued to see noise during the day but remained flat overall. Both are sitting on or around key levels ($4000 for Gold and $60 for Silver), but both are struggling to gain any strength despite falling oil prices and lower likelihoods of significant rate hikes. It seems the metals need a catalyst to really gain support, which could come in the form of NFP today. A weak print could give metals the help they need to break past the key levels and move higher, so today's results are key to the next few weeks.
Today's Key Market Drivers
NFP, 1:30 pm UK time - The single largest event of the day, this will affect all markets and will be keenly watched.
US Unemployment Rate, 1:30 pm UK time - This is released at the same time as the NFP figure. This will be a less impactful figure, but could couple with NFP to have a significant effect on the market.
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