- Dollar keeps climbing as Fed officials talk rate hikes ahead of June payrolls data
- Stocks, bond yields and commodities move in tandem, inch lower after rebound
- Shooting of ex-PM Abe in Japan adds to risk-off vibe, yen firms
Markets in anxious wait for NFP report
Recession worries may have ebbed somewhat this week, making way for a rebound in equities, but investors continue to be gripped by fear amid the extreme uncertainty surrounding the outlook. Economic indicators in America, Europe and elsewhere are undeniably heading south, even if there have been a few positive surprises in some of the data.
But policymakers are adamant that a recession can be avoided as they make the case for monetary tightening. Fed Governor Christopher Waller downplayed the risk yesterday, saying “I personally think some of the fears of a recession are overblown", while James Bullard, head of the St. Louis Fed, pointed out that people are mistaking a slowdown for a recession.
Both are voting FOMC members this year and both support another 75-basis-point rate hike at the next meeting. However, there was relief on Wall Street as the two policymakers – considered to be the most hawkish – signalled they would like to see a slower pace of rate increases after July. Moreover, although Bullard repeated his desire to get rates up to 3.5% by year-end, he was open to a rate cut in 2023.
With investors finding themselves compelled to continuously revise their risk assessment for a recession, and in turn, their predictions for the Fed’s tightening path, there is an even greater degree of nerves for today’s nonfarm payrolls report out of the United States.
Jobs growth likely slowed to 268k in June but the unemployment rate is expected to remain at 3.6%. Following the weak employment readings in the ISM PMI surveys, a miss in the headline figure seems quite likely so the cautious mood may be justified.
Wall Street on track for weekly gains
Nevertheless, there was a little bit of optimism in the markets on Friday even as Fed rate hike bets look set to finish the week stronger and the 10-year Treasury yield is flirting with 3.0% again. The intensifying talk of a recession over the last few weeks may actually have put a floor under the selloff in equities, at least for US stocks as Fed speculation has shifted from rate hikes to rate cuts.
But the Fed will only cut rates if inflation has started to drop significantly and that’s where commodities come into the picture. The downward trend in everything from oil to food to industrial metal prices since June has raised hopes that central banks won’t need to act with as much force as previously thought.
This probably also explains why bond yields have been taking their cues from commodity prices lately, and more specifically, from energy prices. Interestingly, though, the price of many commodities, including oil, appears to be driven more by broader risk sentiment rather than from supply constraints, which is why there has been some positive correlation with stocks too this week.
US stock futures were last trading lower, European indices were mixed, and oil prices were also negative following solid gains yesterday. However, the tech-heavy Nasdaq is still staring at possible weekly gains of just under 4%.
In Asia, the announcement in China that the government will spend an additional $220 billion on infrastructure projects lifted shares in the region, though the local stock market closed down slightly.
Yen advances after ex-PM Abe dies in shooting
Meanwhile, shares in Tokyo pared earlier sharp gains after news broke that former Japanese Prime Minister Shinzo Abe has been shot. Abe has since been confirmed dead and the incident has somewhat dented the positive start to the day, boosting the safe-haven yen and US dollar and underscoring how fragile sentiment is right now.
The shooting comes days before Japanese voters go to the polls to elect a new upper house on Sunday. However, with the ruling LDP party comfortably ahead in opinion polls, the election is expected to be a non-event for the markets.
Euro and pound on the slide again
Both the greenback and yen were firmer across the board, painting a more decidedly risk-off picture than equity markets. The euro plumbed a fresh 20-year low, coming within a whisker of parity as it momentarily hit $1.0070.
But it was the pound that was the worst performer, which fell back below the $1.20 level that it had reclaimed on Thursday following Prime Minister Boris Johnson’s resignation. What started out as an end to the political uncertainty quickly turned to concerns about Britain being in a state of paralysis while the Conservative party elects a new leader – something that could take weeks, if not months.
The renewed weakness in the euro and sterling bolstered the dollar index to a fresh two-decade high of 107.79.