3rd September - Metals Bounce As Yen Surges
In terms of geopolitics, the situation remains where it was, with the conflict ongoing and oil holding at elevated levels. Brent is sitting around $97 and US Oil near $89, so while we have not seen any further escalation this week, we also have not seen anything that would suggest a resolution is close. That elevated oil price continues to be the source of the inflation impulse that is driving everything else in this market at the moment, and until it comes down meaningfully, the pressure on the Fed does not ease.
The main data yesterday was the ADP employment figure, which came in at 38,000 against an expected 47,000 and down from an upwardly revised 46,000 in July. That is the smallest monthly gain since January, but the composition is worse than the headline suggests. Education and health services alone added 45,000, which is more than the entire figure, with leisure and hospitality adding 16,000 and construction 12,000. Manufacturing lost 17,000 and professional services also declined. So outside of three sectors, the private economy actually shed jobs last month.
That sets up a bearish lead into tomorrow's NFP, and sits alongside Tuesday's JOLTS data which showed the hiring rate at a seven month low. The labour market is visibly cooling. The problem for Warsh is that ISM prices paid remain stuck at 71.1, so he has weakening employment on one side and sticky inflation on the other, which is the stagflationary combination that leaves a central bank with no good options. He cannot ease into the weakness because inflation will not come down, and that is precisely why the market is still pricing a September hike at over 60% despite a labour market that is quite clearly softening.
Forex
The story here is the yen. USD/JPY has fallen from Tuesday's high of 160.39 to around 157.53 this morning, a drop of roughly 1.8%, with a 0.93% fall yesterday followed by another 0.72% today. We won't be able to confirm whether an intervention actually took place in the short term, but the speed of the move and the timing, coming immediately after the pair breached 160, certainly fits the pattern.
There is a detail from the July intervention that I think is worth revisiting here, because it connects the currency story directly to the bond story. Japan holds roughly $1.2 trillion in foreign exchange reserves, the vast majority of it in US Treasuries. If Tokyo intervenes alone, the mechanical sequence is that it sells Treasuries, takes the dollar proceeds, and then sells those dollars to buy yen. In other words, a unilateral Japanese intervention puts a large forced seller of US government debt into the market at precisely the moment yields are already at twenty year highs. US participation in the intervention reduces that problem, because every dollar of yen buying done by Washington is a dollar Tokyo does not need to fund by liquidating reserves.
What made July unusual was that the US Treasury sold euros rather than dollars to fund its side of the operation, which surprised markets, as coordinated intervention has traditionally been funded with dollar assets. The obvious reading is that selling dollars would have meant the US actively and visibly weakening its own currency, which is an awkward thing to do while your central bank is publicly committed to fighting inflation. Selling euros achieves the same yen support while leaving the dollar out of the transaction entirely. It is worth noting that Robin Brooks at Brookings has argued the unusual structure could ultimately weaken rather than strengthen confidence in the yen, precisely because it invites investors to ask what Washington was trying to avoid.
Elsewhere, the AUD/NZD move flagged yesterday has continued, with the cross rising over 1% on the RBNZ's dovish guidance and the Aussie GDP beat. It has eased back slightly this morning but the move has been a clean one. The euro and sterling were both quiet, with EUR/USD flat at 1.1589 and GBP/USD down 0.23% to 1.3484, both recovering a little this morning as the dollar softened.
Indices
A much better session, with all three indices snapping a three day losing run. The Dow rose 0.56% to 53,061, reclaiming the 53,000 level, while the S&P 500 added 0.46% to 7,666 and the Nasdaq gained 0.45% to 26,217. The Dow was led higher by Nvidia and Johnson & Johnson.
One distinct positive from the day was the breadth of the move. Nine of the eleven S&P sectors finished higher and around 60% of the index's components advanced, which is a marked contrast to last Thursday when technology was the only sector in the green. That was a rally built entirely on one company's earnings. This was a proper broad based recovery, and those are considerably healthier.
The cause was straightforward enough. The 10-year yield actually hit a new high of 4.818% during the session, a level we have not seen since November 2023, before easing back through the afternoon. It was that retreat in yields that allowed both equities and the metals to rally. It is worth noting that this is not purely an American problem either, as yields in the UK, Germany and France also rose, so what we are seeing is a global repricing of sovereign debt rather than something specific to the US.
That said, I would not get carried away. Kristina Hooper at Man Group said yesterday that a 10-20% pullback in US equities is "absolutely still coming," and while I would not put a number on it myself, the underlying problems have not gone anywhere. Oil is still around $95, yields are still extremely high, and the Iran conflict is still unresolved. Broadcom, Snowflake, HPE and NetApp all reported after the bell, with Broadcom the one to watch as the read on whether AI spending extends beyond Nvidia.
Precious Metals
Gold bottomed at $4,284 yesterday and has rallied to $4,430 this morning, a bounce of roughly 3.5% off the low, while silver bottomed at $63.31 and has since reached $65.90, up around 4%. Silver has therefore recovered close to half of its three day loss in under two sessions, which is a rapid turnaround.
After three sessions of heavy selling, both metals have found support and bounced hard. The zone in Gold I had marked out in the past (around $4,350) has reacted well, where we had seen a level of past support coincide with the 0.5 fib retracement and the 200 day moving average. The question, as always, is whether this is a genuine floor or simply a dead cat bounce within a larger correction. I would offer one note of caution, which is that the bounce coincided with yields easing back from their highs rather than with anything structural actually changing. The 10-year printed a new high before it retreated, oil is still at $97, and the Fed is still expected to hike this month. None of the conditions that caused the correction have gone away.
That said, this is the first genuinely constructive session we have had since the peak, and it does at least suggest the selling was overdone rather than the start of something far more serious. I am watching tomorrow's NFP closely. A soft print would undermine the case for a September hike, which would pull yields lower and give the metals a genuine reason to move higher rather than simply bouncing. A strong print does the opposite and likely sends us straight back to testing yesterday's lows.
Today's Market Drivers
US Unemployment Claims, 1:30pm UK time - Takes on additional weight after the soft ADP print, as another read into tomorrow's NFP.
US NFP, tomorrow - The dominant event of the week. ADP at a seven month low and JOLTS hiring at 3.2% both point to a soft print, which would cut against the September hike currently priced at over 60%.
Comments