4th August - Dollar Bounces Back
The main news story from yesterday was the strong ISM Manufacturing data release, which came in at 55.6 — up 2.3 points from June, well above the 54.0 expected, and the strongest reading since May 2022. There were no real developments in the Middle East, and so markets were able to focus on the data release, which showed support for the US economy and went against the cooling narrative we had seen since the FOMC meeting last week.
One of the most striking data points within the overall release was that the employment index surged to 52.8, over the 50 mark for the first time in 33 months. This week, we are due to see a number of key data releases surrounding the US labor market that will have significant effects on markets overall. This data release could be an indication of what is to come and so is being seen as supportive for the USD. A strong labor market and reducing inflation is an indication that maybe the Fed is right in not pushing for rate hikes sooner, which brings back some credibility when it comes to managing the economy and restores a measure of confidence from the market. Today, we see JOLTS Job Openings figures released, which will give us another indication of whether this positivity can be sustained through the week and now takes on a little more importance.
Outside of the ISM figures, we saw oil fall again yesterday as there were no new escalations in the Middle East. Brent is now below $90 and US Oil below $80, with signs pointing to a continued drop should we not see further escalation.
Forex
The USD reversed course yesterday and pushed higher on the positive ISM news, pulling back some of last week's losses and seeing the DXY move back to 100.000. The USD outperformed all currencies on the day except the JPY, which it held flat against as we continued to see JPY support following last week's major interventions.
The positive news is important when looked at in light of the increased longer-term yield story we discussed yesterday. I had suggested that the higher yields may have been a sign of distress and so USD negative, rather than a USD positive as would normally be the case. If this week we see data releases that help to restore confidence in the market and credibility in the Fed, then maybe this flips how yields are affecting the USD and becomes a net positive. The USD bouncing could be the traditional read reasserting itself. These developments all make this week's NFP report (and to a lesser extent the smaller jobs data releases leading up to it) hugely significant; surprises either way could move the market for weeks to come.
Outside of the USD, the JPY continued to show strength after last week's huge intervention, with the USD/JPY the only pair to avoid a negative day. The EUR and GBP were broadly flat as market focus was elsewhere, whilst the CHF lost ground as capital moved to other similar safe-haven assets like the USD and JPY. The commodity assets (CAD, AUD, NZD) had mixed days with no real direction, as markets were focused elsewhere.
Indices
The risk-on moves in stocks continued with some force yesterday, with all three major US indices up at least 1%. The Dow Jones and S&P 500 are both now close to all-time highs, while the Nasdaq has regained 50% of its fall from all-time highs back at the start of June. This is the third positive day in a row for all three markets and was further boosted by the strong ISM figures. Indices have benefited from the de-escalation in the Middle East and reduction in oil prices, and are now looking in a strong position overall.
It is interesting to note that the move was across all sectors of the market, as opposed to just the tech sector or just the value stocks. Once again, the positive tone in stocks will be affected significantly by the NFP report on Friday, so the news leading up to it and the data release itself will be a key factor in whether this is a longer-term return to all-time highs or a temporary move in a ranging market.
Precious Metals
Despite the positive news surrounding the ISM release, metals more or less remain as they were. Both gold and silver were falling on the day before the news release, and both ended the day slightly positive, but the bigger picture surrounding the metals remains the same as it was before the start of the week. The NFP release on Friday will be important for metals as it will play a role in the FOMC interest rate decisions moving forward. As we have said time and again, until we see a sign that the rate hike cycle has come to a close, metals will be stuck where they are.
Todays Key Market Drivers
US JOLTS Job Openings, 3pm UK time - The first of the week's data releases solely focused on the labour market, coming after the strong ISM employment component. Another firm number builds the "economy isn't cooling" case and supports the dollar's bounce; a soft one revives the distress-signal read.
CHF CPI, 7:30am UK time - The inflation print for the franc, which remains caught between its safe-haven role and the SNB's zero rate.
NZ Employment, 11:45pm UK time - The key quarterly labour data for the Kiwi ahead of the RBNZ's next move.
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