Summary: The blowout U.S. employment report surprised the market and took treasury yields and the dollar higher. The market has repriced a 75-basis-point hike being on the table for the September FOMC. Stock markets were resilient and managed to recoup most intraday losses.
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities plunged after a blowout employment report as it increased the odds for the Fed to stay on its course to raise rates into next year. The market however managed to recoup most of the losses with S&P 500 down 0.16% and Nasdaq 100 off 0.78% at the close. Among the constituents of S&P500, 431 companies have reported as of Friday and 53% of them reported earnings beating market consensus by more than one standard deviation. Better-than-feared earnings have been lending supports to the equity market.
The July employment report was exceptionally strong with payroll, unemployment rate and hourly earnings all surprised to the upside. U.S. treasury yields moved sharply higher right after the job data hit the wires. The front-end sold off the most as 2-year yield soared 18 basis points to 3.23%. 10-year yields climbed 13 basis to 2.83. The 2-10 year yield curve went further inverted to negative 40 basis points. The front-end treasury curve and money market rates have repriced the September FOMC with a likely 75 basis point hike.
After spending the morning treading water, A-shares rallied strong in the afternoon and the northbound flows reversed from over USD 300 million outflow to more than USD400 million net inflow into A-shares. CSI300 closed 1.4% higher. More media reports talking about additional and front-loaded infrastructure investment and the prospect of government hangout of consumption vouchers help boost sentiment. SMIC (00981:xhkg) and Hua Hong (01347:xhkg) surged the third day in a row, rising 7.1% and 13.3% respectively on optimism of government support and potential increase in demand if domestic users of semiconductors shift from Taiwanese suppliers to local suppliers.
US dollar trade higher across the board and gained the most against the Yen, the most interest rate differential sensitive currency. As U.S. 10-year yield jumped 10 basis points, the Yen lost 1.6% to the greenback. USDJPY is trading at 135.13 as of writing.
The nonfarm payroll report surprised to the upside and showed that the U.S. added 525k jobs in July, more than doubling the 250K consensus as per the survey by Bloomberg. The previous two months together had a net upward revision of 28K. Unemployment rate fell from last month’s 3.6% to 3.5% in July, the lowest level since 1965. Average hourly earnings rose 0.5% in July, above market expectation of 0.3% and June average hourly earnings were revised up 0.1 percentage point to 0.44%. The strong hourly earnings data rebuts the peak inflation thesis and points to upside risks in inflation. The market has put a 75 basis points back on the table for the September FOMC meeting. Last Monday, we put forward the idea of shorting September 2023 3-month SOFR futures (SR3U3) at 97.20 or 2.80% yield to implement the view of rebutting the peak inflation and peak rate these. SRS3US is trading at 96.76 or 3.24% yield.
Over the weekend, Fed Governor Michelle Bowman reiterated the Fed’s duty to bring inflation down to the 2% target and said that “similarly-sized increases should be on the table until…inflation declining in a consistent, meaningful, and lasting way.”
The Democratic Party in the U.S. is working on getting an 1% excise tax on share buyback into legislation.
In U.S. dollar terms, China’s exports grew +18% YoY in July, exceeding market expectations (Bloomberg consensus 14.1%). The growth was broadly based, +18.5% with Japan, 32% with ASEAN, +22.9% with the EU and +10.9% with the US.
For a week-ahead look at markets – tune into our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
