7th August - All Eyes On NFP
In terms of geopolitics, the picture remains largely unchanged, with the agreement between Iran and Oman on a shipping route through the Strait of Hormuz still in place but the implementation details yet to be clarified. That uncertainty was enough to see oil rise yesterday, as investors turned cautious on whether the deal will actually translate into normal flows through the waterway any time soon. It is a useful reminder that an agreement in principle and barrels actually moving are two very different things, and the market is clearly not yet willing to price the latter.
That rise in oil had a knock-on effect through the rest of the market, and it is worth following the chain because it shows just how central oil has become to everything at the moment. Oil rose, which lifted wholesale fuel prices and pushed Treasury yields higher, which in turn revived concerns that the Fed could hike as soon as next month. The result was that equities fell and the Dow snapped a five-day winning streak. It was almost exactly the reverse of what we saw on Wednesday, and it demonstrates that the entire market is currently trading off a single variable far more than normal.
Today, however, everything takes a back seat to the Non-Farm Payrolls report at 1:30pm UK time. This is the most important release of the week by some distance, and it lands with rate expectations having moved a long way in a short space of time.
Forex
The dollar recovered a little ground yesterday as yields rose, with the 10-year at 4.62% and the 2-year at 4.20%. The EUR fell 0.26% to 1.1524, the GBP fell 0.11% to 1.3453 and the AUD fell 0.36% to 0.7031, while the USD/JPY rose 0.44% to 158.44. All fairly modest moves, which tells me the market is keeping its powder dry ahead of today's data rather than taking any strong directional view.
The interesting thing heading into the NFP is what the rest of the week's labour data has actually told us, because it is not as one-sided as the headlines suggest. Wednesday gave us a very weak ADP figure at 44k and an ISM Services employment component that fell into contraction at 47.4. But yesterday told the opposite story. Jobless claims came in at 199,000, below the expected 202,000, and Challenger layoffs fell to 33,429 in July, the fewest in two years and 46% lower than a year ago. On top of that, the ISM Manufacturing employment index moved into expansion for the first time in 33 months.
What this gives us is a labour market where hiring is clearly slowing but firing is not picking up at all. Layoffs are running at historic lows, with claims averaging around 211,000 this year against a 30-year average north of 300,000. That is a low-hire, low-fire market rather than one that is genuinely cracking, and it is an important distinction. Despite that, the market has been consistently pricing out rate hikes all week, with September odds falling from 61.9% on Tuesday to around 57% on Wednesday and 54.9% by yesterday morning. The market has clearly decided to weight the hiring data more heavily than the firing data, and that tells us exactly what today's report will be judged on. It is the headline payrolls number and the unemployment rate that matter, not any reassurance that people are keeping their jobs.
Indices
The Dow fell 0.85%, to close at 53,885, snapping a five-day winning streak that had taken it to record highs. The S&P fell 0.18% to 7,709 and the Nasdaq was almost flat, down just 0.06% to 26,348. Eight of the eleven S&P sectors closed lower, with industrials, real estate and materials taking the biggest hits, while energy was one of the few gainers as oil rose.
It is worth noting that this was not an earnings story. Of the 411 S&P 500 companies that have reported so far, 87% have beaten expectations, against 82% at the same point last year, with average earnings growth of 25%. The market is not falling because companies are performing badly, it is falling because of external factors. Salesforce dropped around 4% on a leadership reshuffle and SanDisk fell 6%, but Disney, Microsoft and Chevron all posted solid gains. One thing to keep an eye on is that SpaceX's first lockup expires, with over 900 million shares set to enter the market, which is a significant supply overhang for a stock that has already been extremely volatile since listing.
One data point from yesterday that fits neatly with the AI theme we have been tracking: AI was the leading cause of announced job cuts for the fifth consecutive month, accounting for 10,970 of July's 33,429 total.
Precious Metals
After Wednesday's explosive move, yesterday was a consolidation day for the metals, and an encouraging one. Gold fell just 0.17% and silver 0.95%, meaning both held onto almost all of the gains from the breakout, and both have pushed higher again this morning. That is exactly what you want to see after a big move. A breakout that immediately gives back its gains is a failed breakout; one that consolidates sideways and then resumes is a healthy one, and so far this looks like the latter.
The levels I have been watching for months, $4,200 on gold and $60 on silver, are both still holding comfortably. But today is the real test. Everything about this move has been driven by the market pricing out rate hikes, and the NFP is the single biggest input into that. A soft print keeps the repricing going and this breakout has every chance of turning into a genuine trend. A firm print, and a week's worth of one-way pricing could reverse in a single afternoon.
My position remains exactly what it was earlier in the week. I am not chasing this. I have waited a very long time for these levels to break and I am content to wait a little longer for confirmation. What I would ideally like to see is a soft NFP followed by some form of pullback in the metals, which would offer a far better entry than buying into strength on a Friday afternoon. I will be looking at the lay of the land at the start of next week before making any medium-term calls.
Today's Key Market Drivers
US Non-Farm Payrolls, 1:30pm UK time - A crucial reading, and the arbiter for the metals breakout, the dollar, and the September hike question. Watch the unemployment rate alongside the headline, given the hiring-versus-firing split.
The Hormuz implementation detail - Agreed in principle with Oman, but the details are unclear and oil rose on that caution. Any clarity moves crude and, through it, the rate story.
CAD Employment Change, 1:30pm UK time - Only affecting the CAD itself, this will nonetheless be an important data point for anyone with a CAD position.
Comments