Head of FX Strategy
Summary: Risk off ensued in the US markets with stocks ad bonds being sold-off after a slew of hot economic data sending signal of re-heating in the US economy. Private ADP jobs data smashed expectations led by a surge in services jobs, while ISM services also beat expectations comfortably. US dollar however failed to get much strength, but other safe-havens such as JPY and CHF outperformed.
US equities plunged lower with S&P 500 taking a look below 4,400 before a slight recovery and closing down 0.8%. NASDAQ 100 also closed lower by 0.75% with Treasury yields seeing a push above critical levels as 2-year rose above 5% in the session and 10-year closed above 4%. NFP data in the US will be the next key test today and further strength could change the setup for equities from here after markets have been on a tear after banking crisis and debt ceiling risks were overturned and AI-led rally continued to add fuel. Meta, meanwhile, gave up its early-day gains despite launching its Twitter rival app Threads which saw over 30 million subscribers in a day.
After the disappointment from Caixin services PMI earlier in the week, China economic concerns grew further as property sector risks re-emerged. Hang Seng Index was down 3% with Chinese banks leading the declines. CSI300 was down 0.7% and further tremors may be felt with fears of US Fed tightening gathering pace after strong private jobs data overnight.
Treasuries were sold off as US economic indicators suggested the economy was re-heating, but a weaker risk sentiment supported the safe havens JPY and CHF, but not the greenback. USDJPY slid below 144 in a choppy move while USDCHF touched lows of 0.8950. EURUSD stayed below 1.09 despite a surge in German factory orders, which seemingly came from a one-off military order. GBPUSD slumped 1 big figure from highs of 1.2780 before a recovery to 1.2740 as expectations of BOE terminal rate touching 7% rose. AUDUSD touched 0.66 big figure while NZDUSD slumped from 0.6220 to 0.6160.
Crude oil prices were relatively unchanged, as the broader risk off sentiment was offset by signs of tightness in the market. Saudi Arabia lifted official selling prices for its flagship Arab light crude to all regions, a sign of stronger demand. EIA data showed crude stockpiles dropping for a third week as they slid by 1.5mn barrels. Saudi Arabia Energy Minister Prince Abdulaziz bin Salman said that recent output cuts will turn the tide of "exaggerated negativity" that has flooded the market. WTI prices slid below $70.50 before a recovery back to $72 while Brent touched lows of $75 before a return to $76.50.
The US services PMI for came in above expectations at 53.9 from 50.3 last and 51.2 expected. The jump was led by a massive surge in business activity, which rose from 51.5 to 59.2, well above the 51.9 forecast. The employment metric saw a strong rise, returning to expansionary territory at 53.1 from 49.2, which serves as an upside risk to today's NFP data due. New Orders also rose to 55.5 from 52.9, laying the path for future activity. Prices paid component cooled but still remained in expansion at 54.1 from 56.2.
ADP report was also hot for June, rising 497k, well above the prior 267k and expected 225k. Job creation surged in June with strong gains in leisure and hospitality, trade and transportation, and education and health services, with total services gains coming is at a solid 373k. While ADP data can encounter double counting issues and lacks any direct correlation to the NFP data due today, there has emerged a risk of an upside surprise in NFP too after a series of strong economic data indicators over the last two weeks. July rate hike probability has jumped to 89% from 85% previously, and terminal rate forecast rose to 5.5% from 5.4% previously.
While the ADP data was hot, jobless claims and JOLTs job openings continued to signal that US labor market may be cooling, albeit at a slow pace. Initial Jobless Claims rose to 248k in the week ending July 1 from the downwardly revised 236k (initially 239k), just above the expected 245k. JOLTS job openings in May fell to 9.824mln from the prior 10.320mln, which was revised lower from the initial 10.103mln and coming in beneath the expected 9.935mln.
Next focus is the June NFP which could show headline gains of 225K from 339K in May, while the unemployment rate is expected to dip to 3.6% from 3.7% in April reversing part of the jump in April. Average hourly earnings is expected to slow slightly to 4.2% YoY from 4.3% previously, remaining unchanged at 0.3% MoM. Any hints of wage pressures remaining firmer could make the July rate hike a done deal, bringing 10-year yield further above the key 4% level.
Japan’s nominal labor cash earnings for May came in at 2.5% YoY, above the 1.2% expected and 0.8% in April. Real cash earnings was still negative at -1.2% YoY but better-than-expected -2.7% YoY. The numbers suggest that the higher pay negotiated at the spring wage negotiation in March may be now filtering through, and may prompt the central bank to consider tweaking its policy as market pressure sustains. BOJ Deputy Governor Uchida was on the wires saying that they will continue YCC “for the time being” to keep monetary conditions easy. He also noted there is still a long way to go before rate hikes and there are no plans to change the 2% inflation target
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
