Nonfarm payrolls: US adds 943,000 new jobs in July

The US economy added 943,000 new jobs in July according to today’s nonfarm payrolls print.

A strong month for US jobs

The unemployment rate fell to 5.4% according to the US Bureau of Statistics as hiring rose at its highest rate for nearly a year last month. The payroll increase was also the largest since August 2020.

New jobs have been added to the economy for six consecutive months.

Estimates had varied wildly this morning before this afternoon’s report was published. Some more pessimistic economists had predicted 350,000 new jobs. Some put the figure closer to 1.2m. However, the Dow Jones estimate came to 845,000. Given this is pretty much the gold standard for NFP number forecasting, we can consider today’s report a big success.

This is doubly true given the market was expecting labour shortages, caused by businesses’ perceived hiring difficulties and rising Delta variant cases.

Average hourly wages increased 0.4% on a monthly basis, beating forecasts. Wages are now 4% higher than they were a year ago.

“The data for recent months suggest that the rising demand for labour associated with the recovery from the pandemic may have put upward pressure on wages,” the BLS said in the report. It was also quick to point out that Covid is still skewering the data.

Overall, job participation stands at 61.7% – the highest level since March 2020. Are things getting back on track for the US? This report certainly suggests that the case.

However, let’s be realistic. The Delta variant is running rampant in the US, where infections are up to 100,000 per day. While these stats are all very encouraging, the pandemic is by no means over.

How did the markets react to today’s NFP print?

The Dow Jones rose 155 points, equating to 0.4%, reaching an intraday record high. Likewise, the S&P 500 rose 0.2% for its own intraday all-time high. The Nasdaq, due to its tech-heavy nature, did not fare so well, dropping 0.2%.

According to CNBC, bank stocks powered today’s gains. Wall Street big names like JPMorgan, Bank of America, and Wells Fargo all recorded 1% gains at market open. Gains were also seen in energy, retailer, and industrial stocks.

On the flip side, tech stocks fell. Observers suggested this may be from investors taking money out of these and push them into growth stocks. Amazon, Apple, and Salesforce were trading slightly down.

The dollar continued to rally on today’s strong NFP report. The dollar index had climbed 0.56% to reach 92.81.

Subsequently, GBP/USD and EUR/USD pulled back on the stronger dollar. At the time of writing, GBP/USD was floating around the 1.387 level, after starting the day pushing over 1.390. EUR/USD was down about 0.67% at the 1.176 mark.

Markets brace for key US job report

Morning Note

Today’s big event is the release of the US nonfarm payrolls report tracking American labour market strength.

July was a bumper month for payrolls with 845,000 new jobs added to the US economy. Is sustained labour market recovery on the way? There remains about a 6.8 million gap in employment numbers needing to be filled to bring up to pre-pandemic levels.

What’s interesting is that economists are presenting a very mixed outlook regarding today’s report. Estimates are varying wildly. The Delta COVID-19 variant has shaken things up in the US over the past month. Cases have spiralled and are heading towards 100,000 per day – higher than in summer 2020 at the pandemic’s height. Like it has for the wider economy, the Delta variant is the same for the job’s market.

Wall Street forecasts are so different it’s hard to gauge what the report’s actual outcome will be at this stage. At the lowest end, estimates clock in at 350,000, accounting for holes in the jobs sector created by the Delta variant. Top-end estimates go as high as 1.2 million.

The unemployment rate is expected to fall from 5.9% to 5.7% on today’s NFP print.

Jerome Powell and the Fed will be watching this metric very closely. The health of the US jobs market is one of the conditions the Fed considers when looking at any alterations to its bond-buying programme.

The Dow Jones, S&P 500, and NASDAQ were all trending slightly down as they wait for the NFP release this afternoon.

European stocks start today with a muted tone too. The FTSE 100, in particular, has dropped roughly 10 points, hitting 7,109. CAC 40 was down 6 points at 6,757, and the Stoxx 50 showed similar performance, falling 6 points to 4,156. Nothing too much to worry about, but a broadly even trend across Europe. Germany’s DAX was in the green, but by rising 2 points, it’s essentially flat.

GBP/USD heads back towards the 1.920 level this morning, down roughly 0.6% on the day. A stronger dollar is making gains against the pound, explaining the pairing’s reversal. The dollar index made gains this morning as it reached 92.36, or roughly 0.07% up in day trading.

Oil prices made some gains back after falling yesterday. WTI, however, is still trading below $70 at $69.56 after starting the week around the $73 level. Brent futures are currently trading at $71.83 after showing similar pullbacks to WTI.

European stocks hit record high, Jes Staley wins out, monster US jobs report expected

Morning Note

European markets rose handily on Friday, with the Stoxx 600 hitting a record high head of the hotly-anticipated US jobs report. The FTSE 100 rallied to take out 7,100, hitting a new post-pandemic high, and the DAX is buoyed by some positive earnings from German firms, with Adidas advancing 8% as it hiked its 2021 sales outlook and Siemens up 2% as it too raised its net income guidance for 2021. Combined the two stocks are adding 70pts to the DAX this morning.

The overriding market themes remain pretty well unabused: A monster commodity rally continues as the global economy heats up, and massive but messy rotation out of the tech/growth/momentum plays into more cyclical/value parts of the market. Copper rallied to an all-time high, aluminium is extending gains. Palm oil 13-year high, iron ore and steel at all-time highs. There is yet room to run higher in the commodity space.

It was a messy session on Wall Street: After some big moves early doors, the Nasdaq composite managed to stage a comeback to close up by 0.37% as dip buyers took up the reins on some of the bigger names. After opening lower, Apple, Microsoft, Facebook and Amazon managed to rally and do the heavy lifting on the index. ARK Innovation ETF declined almost 3% and is down 10% this week alone. By the end there were 75 advancing stocks to 26 decliners on the Nasdaq 100. But there was a clear wobble. The S&P added 0.82% as financials led the way and the Dow Jones added another 300+ points for another record high. Pandemic favourite Etsy tumbled 15% on earnings, whilst reopening favourites MGM and Norwegian were both down more than 6%.

Zoom was down again, back to levels last seen in August last year – is the WFH boom over? DocuSign is also trading at a level not seen since the summer of 2020 just before it really took off on some strong revenue growth and expectations for a new normal. Things have changed – vaccines mean we are getting back to the old normal. Bosses are demanding workers make plans to get back in the office.

In the wake of the Archegos blow-up, many are rightly looking to the very high levels of margin debt as a potential red flag. The Federal Reserve – cheerleader in chief for the market rally – agrees. In its semi-annual report on financial stability the central bank warned that existing gauges of hedge fund leverage “may not be capturing some important risks”. It also helpfully said risk assets could decline if risk appetite falls. They might as well say stocks can fall is there are more sellers than buyers, too…

Sterling has failed to make any real headway in the wake of the Bank of England decision despite softer Treasury yields, which are holding under 1.57%, removing some support for the greenback, with the dollar index slinking back under 91. Although it significantly upgraded its near-term economic forecasts and announced a form of ‘technical’ taper’ of bond purchases, the Bank’s outlook on inflation suggests it will be in no rush to raise rates this year. That could act as a headwind for sterling bulls. GBPUSD looks a little perky in early trade today above 1.3920, having fallen to 1.3860 yesterday shortly after it hit a one-week high above 1.3940 at the time of the MPC’s statement. Watch for the Scottish election results coming in over the next 24 hours for a signal on how much pressure for a second independence referendum we might expect. UK breakup remains a tail risk underpriced by the market but one that can probably be confidently kicked down the road for at least 8 years – the current Tory government won’t grant a referendum. Today’s Hartlepool by-election result underlines how far Labour still need to travel to mount any kind of challenge to Boris at the next election.

Jes Staley’s disposition might be likened to the Cheshire cat this morning. Sherborne Investors, the vehicle led by activist investor Edward Bramson, announced it had sold its 6% stake in Barclays. The move ends a high-profile battle over the direction of the venerable British bank, and particular Staley’s pursuit of investment banking success. Barclays shares rose 2% in early trade on the news. It reflects a couple of things. First, the investment banking arm at Barclays has been doing rather well. Earnings from the investment banking arm rose 22% to £12.5bn last year, its best since 2014. The Q1 performance was also solid, with growth in equities trading revenues of 65% ahead of US peers, although Staley admitted FICC ‘wasn’t where we wanted it to be’. The 35% drop in FICC trading was mainly down to tough comparisons with last year – not a terminal problem.

Staley was mainly right, Bramson was mainly wrong. There were always doubts about the whole ‘shrink to grow’ concept that has underpinned the strategy of the likes of Deutsche Bank. Barclays rightly pursued a different course and maintained a more diversified revenue stream. When consumer and business growth markets are strained – like during the pandemic – volatility in financial markets creates a good environment for trading revenues to prosper. Moreover, the stock has enjoyed some decent returns in the last year, getting back to around the level it was at before the pandemic, so it’s a handy time to exit. Sherborne also notes that it has found another target that it did not name. A prize to whoever finds out what it is.

It’s nonfarm payrolls day. ADP numbers were good, but a little light of expectations. Unemployment claims were under 500k for the first time since the pandemic hit. The readings prove the US economy is positively purring. So, the outlook is good and expectations high – something like 1m jobs are expected to have been created by US employers last month, topping the total for March. The question really is how fast the labour market can make up the still roughly 8m jobs lost since the pandemic, at which point the Fed will, by its own policy stance, considering tightening monetary policy. Atlanta Fed president Raphael Bostic said he’s expecting “a really strong number, and that would be encouraging,” but said a 1m+ number would not trigger a debate among policymakers on tapering the Fed’s $120bn-a-month bond buying programme. A couple of monster jobs reports do not make a for a taper discussion, but give it a few months and – at the current expected pace of expansion – the Fed will be in a position to tighten. Markets are already working on this – beware linear thinking.

The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP

Equities
Forex

With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.

The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.

“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.

He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.

His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.

Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.

Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.

Lagarde new ECB president

Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.

Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.

It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.

However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.

Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.

Non-Farm Payroll better than expected

Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.

It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.

The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.

However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.

As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.

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