Summary: The mood across financial markets have certainly changed with the US debt downgrade from Fitch and more indicators suggesting significant headwinds in the global manufacturing sector. Stagflation is now clearly a scenario that cannot be ruled out. Despite the fresh risk-off waves hitting markets US equity futures are attempting to rebound in early trading.
S&P 500 futures are attempting this morning to rebound off the important 4,500 level up 0.4%. The market is weighing the balance between worsening credit conditions leading potentially to a recession and the mixed NFP figures on Friday that might lead the Fed to move to easing mode. The market is getting more nervous and focus will be on credit indicators and company outlooks in the Q2 earnings releases.
The US dollar slid on Friday amid a headline miss in July NFP, even as the details of the report had some hawkish elements. Treasuries gained on Friday after a sell-off earlier in the week and underpinned a softer dollar. Lower Treasury yields also helped the Japanese yen, USDJPY slid below 142 from highs of 143.89 last week but pair made its way back higher to 142.20 in the Asian session. EURUSD gained to 1.1042 but focus returned to 1.10 in the Asian hours today. GBPUSD had a more modest reaction to USD selloff, trading below 1.2750 with BOE’s dovish turn last week underpinning. AUDUSD also unable to sustain gains above 0.66.
The supply tightness concerns continued to underpin the crude oil market which saw a sixth consecutive weeks of gains last week amid announcements of deeper cuts from Saudi Arabia and Russia and sharp declines in inventory. WTI crude prices rose 1.5% while Brent rose 1.3% despite a mixed NFP report. This morning Brent Crude is sliding a bit lower from Friday’s close.
The problems in Siemens Energy’s wind business are certainly not over with the company announcing this morning that it sess fiscal loss of €4.5bn due to more writedowns in its wind business due to faulty wind turbine designs. On a positive note Q3 orders (ending 30 June) are €14.9bn vs est. €9.9bn driven by strong order growth in its wind turbine business and grid technologies related to electricity infrastructure.
Headline jobs added came in at 187k in July, missing the 200k estimate and coming in just above last month’s 185k which was revised lower from 209k. Private payrolls jumped to 172k from 128k, while government payrolls were responsible for a much smaller 15k jobs in July vs the high 57k in June. Elsewhere, the unemployment rate moved lower to 3.5% from 3.6% and the average hourly earnings were hot as well, rising 0.4% M/M (exp. 0.3%, prev., 0.4%), with the Y/Y rising 4.4% (exp. 4.2%, prev. 4.4%), although one also has to consider the average hours worked falling to 34.3 in July, back to the joint-lowest post-COVID. Such a report keeps the market reluctant to price in another Fed rate hike, but a host more data is due ahead of the next meeting, importantly the CPI due this week.
Some hawkish comments from Fed member Michelle Bowman were heard over the weekend. She warned more rate hikes "will likely be needed," a contrast with other Fed officials advocating wait-and-see. The governor is "looking for consistent evidence" that inflation continues to moderate. Raphael Bostic and Austan Goolsbee said after Friday's slower job growth data that the labor market is becoming better balanced, so the FOMC can afford to be patient. Note that Bowman and Bostic are both having speeches today.
Danish shipping and logistics group Maersk, the world's largest owner of container ships and one of the best bellwethers for global trade, warned of a “longer and deeper” contraction in global trade. Maersk now sees global container volume growth in the range of -4% to -1% compared to -2.5% to +0.5% previously.
Global food prices increased the most in 1.5 years as trade disruptions from the El Nino weather phenomenon battered agricultural-producing countries, and Russia's exit from a crucial UN-backed agriculture deal stoked supply concerns. The Food and Agriculture Organization of the United Nations (FAO) reported Friday that the global food index, which tracks monthly changes in the international prices of globally-traded food commodities, averaged 123.9 in July, up 1.3% from the previous month. This was the largest monthly gain since March 2022.
Central banks around the world added a record amount of gold to their reserves through the first half of 2023. Net central bank gold purchases totalled 387 tons through the first half of the year, according to data compiled by the World Gold Council. That was the highest first-half total since the organization started compiling quarterly data in 2000. China’s PBoC was the biggest buyer, followed by Singapore’s MAS, while Turkey turned to be a net seller in Q2 due to local market dynamics.
The problems are growing in Europe’s manufacturing sector with Germany leading the weakness. With credit conditions tightening and more negative signals coming from the global cyclical manufacturing sector Europe could become the first beacon of what to expect, so we are monitoring European equities and bonds this week.
The Q2 earnings season has so far been a positive for the equity market with revenue and earnings surprising to the upside with the consumer discretionary being the biggest positive surprise on a sector level. This week the earnings will continue albeit at a slower pace than the previous weeks with today’s US earnings focus on private equity firm KKR and software company Palantir.
Earnings this week:
0830 – Eurozone Sentix Investor Confidence
1230 – Fed speeches from Bostic and Bowman
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
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