Summary: Equities rallied hard in the US in the wake of a slightly weaker than expected payrolls change data for May, perhaps as the market feared that too strong data would unseat complacent forward rate expectations from the Fed. At the weekend, a G-7 meeting produced an agreement on minimum taxation rules that will particularly affect the US internet giants. Focus this week on the latest US CPI data and an ECB meeting on Thursday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – Friday’s weaker than expected Nonfarm Payrolls was a boon for technology stocks pushing Nasdaq 100 futures into its highest close since 3 May, as the figures were interpreted by this part of the equity market as interest rates will stay lower for longer. Our view remains that this is the wrong interpretation by the market, and that the inflationary dynamics will increasingly become entrenched at higher levels changing the narrative to inflation not being transitory and that the Fed will have to move sooner rather than later.
Euro STOXX 50 (EU50.I) - volatility continues to come down across many equity markets and STOXX 50 futures trading ranges have collapsed to less than 1% in the past four trading sessions. There are no major macro figures on the table today that can move European equities except for Sentix Investor Confidence at 0830 GMT. Otherwise, our view is that STOXX 50 futures will try to aim for breaking above the 4,100 level today.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). This weekend was a particularly quiet one for cryptocurrencies, with Bitcoin mired in the lower part of the recent trading range below the key 40-42k resistance, while Ethereum has rebounded from a dip and traders there will focus on the major resistance at 3,000 this week that has capped price action since May 20.
EURUSD – the US dollar posted a local high last week in the wake of strong ADP private payrolls and other data indicating a white-hot US economy, only to sell off sharply on Friday after the release of the weaker than expected May non-farm payrolls growth number. It is difficult to interpret Friday’s action, given that it feels like the market is chopping back and forth without directional follow-through recently, possibly suggesting that we may have to wait for the June 16 FOMC meeting to get a stronger impression of what lies ahead for the US dollar. The ECB meets on Thursday and will also bring its latest economic forecasts, but will likely produce similar expectations to the Fed in indicating that current inflationary pressures will prove transitory. The ECB will be reluctant to tilt too hawkish, at least, with the EUR trading near the top of the range versus the USD.
EURSEK – with risk sentiment still in a very positive mood in Europe and higher-than-expected inflation numbers keeping any thoughts of Riksbank dovishness at bay while Europe’s main surge of reopening growth is just now set to unfold, the Swedish krona looks in a good place to try punching higher versus the single currency as the huge 10.00 level looms for EURSEK, a level the pair has not traded below since early 2018, although given that Friday’s sell-off in EURSEK to new local lows coincided with the US employment data that send US treasury yields lower, SEK may require that global yields remain tame.
Gold (XAUUSD) trades softer in early trading following an end of week rollercoaster ride where prices first slumped on emerging profit-taking, only to bounce back on Friday following what looked like “Goldilocks” US payroll date (see below). Gold’s so far shallow correction following a 240-dollar rally highlighting the risk that all is not done yet on that front. The first key downside support level that will determine the underlying strength of the market is the 200-day moving average at $1842. Focus on the dollar and whether yields can maintain their Friday drop, Bidens spending plan and the market reaction to the G7 tax agreement (see below).
Speculations for a June Federal Reserve tapering weakens, but probability to discuss it during Jackson Hole increases (TLT, IEF). Ten-year US Treasury yields dropped to 1.55% after the jobs miss. However, wage growth is robust indicating that, after all, inflation might not be temporary. It may be what Janet Yellen is looking at when commenting on the beneficial impact of higher interest rates, showing that ground for tapering starts to being laid down. Although the Federal Reverse will not discuss tapering at next week’s meeting, we expect it do to so at Jackson Hole, pushing 10-year yields to 2%.
European sovereign yields may be volatile ahead of the ECB meeting on Thursday (VGEA, BTP10). We expect the ECB to keep monetary policies unchanged on Thursday as demand for EU government bonds continues to be weak. Yet, we might see yields rising ahead of the ECB meeting with Germany and Italy issuing long terms bonds. The correlation between US Treasuries and European sovereigns continues to be positive. Thus, it remains vital to understanding the direction of US peers before positioning, despite monetary policies in the bloc remain unchanged.
What is going on?
US payrolls change a “Goldilocks” data release for market, but note rapid earnings growth, equities and treasuries rallied sharply on the release of the US May jobs report, with the nonfarm payrolls change registering a solid +559k increase with a small positive revision to the prior two months’ data. After the May ADP private payrolls change data showed huge payroll gains near 1 million jobs earlier in the week, the market was perhaps fearing a very strong official NFP payrolls change that might lead to a sudden course correction from the Fed and a spike in hawkish expectations, but this slight miss is a “Goldilocks” number that suggests nothing is amiss with the recovery while possibly buying more time for the Fed to sit on its hands on policy guidance. Do note, however, that the May Average hourly earnings report came in very hot for a second month in a row with a 0.5% month-on-month increase after April’s +0.7%.
G-7 meeting at the weekend announced minimum tax of 15% for global. The G-7 meeting of finance ministers at the weekend produced an agreement to would see member countries collecting higher taxes from especially the huge US internet and tech firms at a rate of “at least 15%”. Details are few, as any eventual deal would have to include far more nations in any eventual framework, but the G20 meeting in July and talks within the OECD group of nations are next steps as this major initiative will inevitably gain traction after the agreement in principle.
China’s imports of major commodities in May were lower than April’s for crude oil, iron ore and coal while a small increase was seen in copper. These developments probably not related to last months attempted clamp down on commodity speculation and hoarding, instead the reduced imports were most likely a response to record prices deterring buyers and the economic recovery from the pandemic begins and massive stimulus begin to slow.
The weekly Commitment of Traders report covering the week to June 1 saw renewed fund buying of commodities following the May correction. All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds increased bullish bets across 24 major commodity futures by 3%. A relatively small change given the strength of the recovery with contracts like copper and wheat seeing a reduction in net longs despite rallying strongly. Perhaps a sign that investors have adjusted their expectations in response to very elevated prices.
What are we watching next?
US CPI print this week to counter the reaction to Friday’s US jobs report? With the May US official Non-farm payrolls showing somewhat slower than expected growth in payrolls (even if earnings were sharply higher), the market is pricing the Fed to make no notable shift in guidance at the FOMC meeting next Wednesday, June 16. One of the last key data points ahead of that meeting is this Thursday’s May CPI report, expected to show headline inflation running at 4.7% year-on-year and core inflation at 3.4%, both multi-decade highs – if the data comes in hotter still, the Fed may need to shift to a more two-way message that sees a shift higher in asset purchase tapering and rate expectations.
Impact of G-7 tax deal on technology stocks. The new G-7 tax deal includes at 20% taxation of profits above 10% profit margin for digital companies, which effectively increases their relative effective tax rate and therefore should be a negative. We will be watching how the market reacts over the week to this new digital tax.
Earnings reports this week. The quietest earnings week since early March
Economic Calendar Highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy